##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K  (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  To Commission File Number 0-26960 ITLA CAPITAL CORPORATION  Delaware
    
    95-4596322(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)888 Prospect Street, Suite 110, La Jolla, California
    
    92037(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (858) 551-0511 Securities Registered Pursuant to Section 12(b) of the Act: None
 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
 (Title of Class)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ No o. As
of March 14, 2005, there were issued and outstanding 5,797,224 shares of the Registrants
Common Stock. The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2004, computed by reference to the closing price of such stock as of June
30, 2004, was $250.9 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the Registrant that such person is an
affiliate of the Registrant.)




---



ITLA CAPITAL CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS PagePART IItem 1 Business
    
    
    3Item 2 Properties
    
    
    13Item 3 Legal Proceedings
    
    
    13Item 4 Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5 Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    
    
    14Item 6 Selected Financial Data
    
    
    15Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8 Financial Statements and Supplementary Data
    
    
    37Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    65Item 9A. Control and Procedures
    
    
    65Item 9B. Other Information
    
    
    65PART IIIItem 10 Directors and Executive Officers of the Registrant
    
    
    66Item 11 Executive Compensation
    
    
    68Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    73Item 13 Certain Relationships and Related Transactions
    
    
    76Item 14 Principal Accountant Fees and Services
    
    
    76PART IVItem 15 Exhibits and Financial Statement Schedules
    
    
    77Signatures
    
    
    78Certifications
    
    
    82EX-10.13EX-10.14EX-10.15EX-10.16EX-21EX-23.1EX-31.1EX-31.2EX-32
  Forward-Looking Statements Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: This Form
10-K contains forward-looking statements that are subject to risks and uncertainties, including,
but not limited to, changes in economic conditions in our market areas, changes in policies by
regulatory agencies, the impact of competitive loan products, loan demand risks, the quality or
composition of our loan or investment portfolios, increased costs from pursuing the national
expansion of our small balance multi-family lending platform and operational challenges inherent in
implementing this expansion strategy, fluctuations in interest rates and changes in the relative
differences between short and long-term interest rates, levels of nonperforming assets and
operating results, the economic impact of any terrorist actions on our loan originations and loan
repayments and other risks detailed from time to time in our filings with the Securities and
Exchange Commission. We caution readers not to place undue reliance on forward-looking statements.
We do not undertake and specifically disclaim any obligation to revise any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or circumstances after
the date of such statements. These risks could cause our actual results for 2005 and beyond to
differ materially from those expressed in any forward-looking statements by, or on behalf of, us. As used throughout this report, the terms we, our, us, or the Company
refer to ITLA Capital Corporation and its consolidated subsidiaries. 2




---



##### Table of Contents



PART I 
 Item 1. Business General ITLA
Capital Corporation (ITLA Capital) is the largest financial services company headquartered in San Diego
County, California with consolidated assets of $2.3 billion, consolidated net loans of $1.8
billion, consolidated deposits of $1.4 billion and consolidated shareholders equity of $194.7
million as of December 31, 2004. We conduct and manage our business principally through our
wholly-owned subsidiary, Imperial Capital Bank (the Bank), an institution with $2.3 billion in
assets, with six retail branches located in California, (Beverly Hills, Costa Mesa, Encino,
Glendale, San Diego, and San Francisco), and one branch located in Carson City, Nevada.
Additionally, the Bank has twenty-six loan production offices serving the Western United States,
the Southeast region, the Mid-Atlantic region, the Ohio Valley, the Metro New York area and New
England. On January 1, 2003, the Bank converted from a California industrial bank to a
California-chartered commercial bank, and ITLA Capital became a bank
holding company. The Bank has
been in business for 30 years. Our branch offices are primarily used for our deposit services and
lending business. The Company is primarily engaged in:  
    Originating and purchasing real estate loans secured by income producing properties for retention in its loan portfolio;
    Originating film finance loans and franchise loans; and
    Accepting customer deposits through the following products: certificates of deposits,
money market, passbook and demand deposit accounts. Our deposit accounts are insured by the
Federal Deposit Insurance Corporation (FDIC) up to the legal limits. In November 2002, we entered into a strategic business relationship with various subsidiaries
of Household International, Inc. (Household), a wholly-owned subsidiary of HSBC Holdings plc
(NYSE  HBC) relating to certain tax refund products. In connection with this relationship, the
Bank originated tax refund anticipation loans and sold Household a non-recourse participation
interest representing substantially all of the outstanding loan balance. We also entered into an agreement in December 2002 with Household pursuant to which the Bank
originated relatively small private label commercial revolving loans to small businesses. Pursuant
to this agreement, the Bank sold Household a non-recourse participation interest representing
substantially all of the outstanding loan balance. During 2004, Household and its affiliates terminated their tax refund and private label commercial
revolving loan programs with the Bank. As of December 31, 2004, the Bank maintained no loan
balances in connection with these programs. On February 23, 2005, the Bank entered into an agreement with Fannie Mae providing for the
origination and sale by the Bank, as a Fannie Mae-approved M-Flex Lender, of small-balance,
fixed-rate multifamily mortgage loans to Fannie Mae, with servicing retained by the Bank. The Loan
Purchase Agreement provides for a two-year term, which Fannie Mae may extend for one or more
nine-month periods. We continuously evaluate business expansion opportunities, including acquisitions or joint
ventures with companies that originate or purchase commercial and multi-family real estate loans as
well as other types of secured commercial loans. In connection with this activity, we periodically
have discussions with and receive financial information about other companies that may or may not
lead to the acquisition of the company, a segment or division of that company, or a joint venture
opportunity. Our executive offices are located at 888 Prospect Street, Suite 110, La Jolla, California
92037 and our telephone number at that address is (858) 551-0511. Lending Activities General.During 2004, our core lending activities were as follows:  
    Originating and purchasing real estate loans, including construction loans, secured by income producing properties.
    Originating franchise and film finance loans. 3




---



##### Table of Contents



Income Producing Property Loans.We originate and purchase real estate loans secured primarily
by first trust deeds on income producing properties. Income property loan collateral consists
primarily of the following types of properties:  
    Apartments
    Mini-storage facilities
    Retail centers
    Mobile home parks
    Small office and light industrial buildings
    Multi-family real estate
    Hotels
    Other mixed use or special purpose commercial properties At December 31, 2004, we had $1.4 billion of income producing property loans
outstanding, representing 88.0% of our total real estate loans and 76.0% of our gross loan
portfolio. Most of our real estate borrowers are business owners, individual investors,
investment partnerships or limited liability corporations. The income producing property lending
that we engage in typically involves larger loans to a single borrower and is generally
viewed as exposing the lender to a greater risk of loss than one- to four-family residential
lending, because repayment of the loan generally is dependent, in large part, on the successful
operation of the property securing the loan or the business conducted on the property securing the
loan. During 2002, we launched a real estate lending platform focusing on originating smaller
balance income producing property loans. In 2003, we commenced a national expansion of this
platform and during 2004, we opened twenty new loan production offices in connection with this
initiative. Income producing property values are also generally subject to greater volatility than
residential property values. The liquidation values of income producing properties may be adversely
affected by risks generally incident to interests in real property, such as:  
    Changes or continued weakness in general or local economic conditions;
    Declines in rental, room or occupancy rates in hotels, apartment complexes or commercial properties;
    Changes or continued weakness in specific industry segments;
    Changes in governmental rules, regulations and fiscal policies, including rent control
ordinances, environmental legislation and taxation;
    Increases in other operating expenses (including energy costs);
    Increases in interest rates, real estate and personal property tax rates;
    Declines in real estate values; and
    Other factors beyond the control of the borrower or the lender. We originate real estate loans through our retail branches and loan production offices. These
offices are staffed by a total of 69 loan officers. Loan officers solicit mortgage loan brokers for
loan applications that meet our underwriting criteria, and also accept applications directly from
borrowers. A majority of the real estate loans funded by us are originated through mortgage loan
brokers. Mortgage loan brokers act as intermediaries between us and the property owner in arranging
real estate loans and earn a fee based upon the principal amount of each loan funded. Since a large
portion of our marketing effort is through our loan officers contacts with mortgage loan brokers,
we do not incur significant expenses for advertising our lending services to the general public. Income producing property loans are generally made in amounts up to 75% of the appraised value
of the property; however, in certain instances, multi-family originations may be made at a loan to
value ratio of 80%. Loans are generally made for terms up to ten years, with amortization periods
up to 30 years. Depending on market conditions at the time the loan was originated, certain loan
agreements may include prepayment penalties. Most real estate loans are subject to a quarterly or
semi-annual adjustment of their interest rate based on one of several interest rate indexes. The average yield on our real estate loan portfolio was
7.13% in 2004 compared to 7.80% in 2003.
Our commercial real estate loan portfolio is primarily composed of adjustable rate mortgages
indexed to six month LIBOR with interest rate floors, below which the loans contractual interest
rate may not adjust. Approximately 83.2% of our real estate loan portfolio was comprised of
adjustable rate loans at December 31, 2004, and approximately
14.5% of the real estate loan
portfolio was comprised of loans, which become adjustable rate loans after an initial fixed
rate period of three or five years. Our adjustable rate loans generally re-price on a
quarterly or semi-annual basis with increases generally limited to maximum adjustments of 2% per
year up to 5% for the life of the loan. As of December 31, 2004, approximately $1.6 billion or
87.3% of our real estate loan portfolio contained interest rate floors, below which the loans
contractual interest rate may not adjust. The inability of our real estate loans to adjust
downward can contribute to increased income in periods of declining interest rates, and also
assists us in our efforts to limit the risks to earnings resulting from changes in interest
rates, subject to the risk that borrowers may refinance these loans during periods of declining
interest rates. At December 31, 2004, the weighted average floor interest rate of our real estate loan portfolio was
6.32%. At that date, approximately $784.5 million or 49.2% of our real estate loan portfolio was at the floor interest rate. At
December 31, 2004, 76.7% of the adjustable rate loans outstanding in our real estate loan portfolio had a lifetime interest rate cap.
The weighted-average lifetime interest rate cap on our real estate
loan portfolio was 11.25%. 4




---



##### Table of Contents



In 2004, 2003, and 2002, we purchased income producing real estate loans totaling $136.5
million, $46.8 million, and $83.6 million, respectively. In our real estate loan purchases, we
generally apply the same underwriting criteria as loans internally originated and reserve the
right to reject particular loans from a loan pool being purchased that do not meet our underwriting criteria. Construction Loans.We originate construction loans for income producing properties, as well
as for single-family residential tract construction. At December 31, 2004, we had $183.2
million of construction loans outstanding, representing 10.1% of our gross loans receivable. In
addition to the lending risks previously discussed, construction loans also present risks
associated with the accuracy of the initial estimate of the propertys value upon completion
compared to its actual value, the timely completion of construction activities for their allotted
costs and the time needed to stabilize income properties. These risks can be affected by a variety
of factors, including the oversight of the project, localized costs for labor and materials, and
the weather. Franchise Loans. We operate our franchise lending operations through a division of the Bank,
Imperial Franchise Finance, based in Tempe, Arizona. Franchise loans are loans to owners of
businesses, both franchisors and franchisees, such as fast food restaurants or gasoline retailers
that are affiliated with nationally or regionally recognized chains and brand names. Various
combinations of land, building, business equipment and fixtures may secure these loans, or they may
be a general obligation of the borrower based on a valuation of the borrowers business and debt
service ability. These loans may be viewed as riskier than our real estate secured loans, as in
each case, the primary source of repayment of a franchise loan is the cash flow of the business and
not the underlying value of the collateral. In addition, in certain cases, the success of the
borrowers business depends on the management talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of these persons could
have a material adverse impact on the business. Many of these borrowers have smaller market shares
than their competition, may be more vulnerable to economic downturns, often need additional capital
to expand or compete and may experience substantial variations in operating results, any of which
might impair the borrowers ability to repay a loan. As of December 31, 2004 and 2003, our
franchise loan portfolio was $137.5 million and $102.1 million, respectively, which represented
7.6% and 6.7%, respectively, of our gross loan portfolio. Film Finance Loans. We conduct our film finance operations through ICB Entertainment Finance
(ICBEF), a division of the Bank. Typically, ICBEF lends to independent producers of film and
television on a senior secured basis, basing its credit decisions on the creditworthiness and
reputation of distributors and sales agents who have contracted to distribute the films. ICBEF
provides loans (with a typical term of 12 to 18 months) and letters of credit for the production of
motion pictures and television shows or series that have a predictable market worldwide, and
therefore, a predictable level of revenue arising from licensing of the distribution rights
throughout the world. ICBEF lends to independent producers of film and television, many of which are located in
California. ICBEF also has borrowing clients outside of the United States. Independent producers
tend to be those producers that do not have major studio distribution outlets for their product.
Large film and television studios generally maintain their own distribution outlets and finance
their projects with internally generated financing. In addition to funding production loans against
a number of distribution contracts, ICBEF has a proprietary system related to valuation of selected
unsold rights to permit financing of a portion of the production budget. Typically, this unsecured
amount does not exceed 10% of the total loan. ICBEFs lending officers review the quality of the
distributors and their contracts, the budget, the schedule of advances, and valuation of all
distribution rights when considering a new lending opportunity. All ICBEF loans require the
borrower to provide a completion bond that guarantees the completion of the film or the payoff of
the outstanding balance of the loan in the event the film is not completed. After closing, each
requested advance is approved by the bonding company on a weekly basis to ensure that ICBEF is not
advancing ahead of an agreed-upon cash flow schedule. The loan documentation grants ICBEF the right
to impose certain penalties on the borrower and exercise certain other rights, including replacing
the sales agent, if sales are not consummated within the appropriate time. Loans are repaid
principally from revenue received from distribution contracts. In many instances, the distribution
contracts provide for multiple payments payable at certain milestones (such as execution of
contract, commencement of principal photography or completion of principal photography). The
maturity date of the loan is generally six to nine months after completion of the production.
Delivery of the completed production is made to the various distributors only upon or after their
minimum guarantees have been paid in full. To the extent a distributor fails to make payment upon
completion of the film, or the predicted level of revenue is less than expected, we may incur
a loss. ICBEF typically charges its customers an interest rate ranging from the prime rate to prime
plus a margin (exclusive of loan fees) on the outstanding balance of the loan. Loan fees typically
range from 1.00% to 2.50% with an additional fee up to 7.0% depending on the unsecured amount of
the production budget being financed. 5




---



##### Table of Contents



At December 31, 2004 and 2003, our film finance portfolio totaled $99.7 million and $98.6
million, respectively, representing 5.5% and 6.4% of our gross loan portfolio as of these dates.
Of these amounts, approximately $12.2 million and $26.6 million, respectively, were issued to
producers domiciled outside of the United States. These foreign loans were primarily issued to
producers located in Australia, Canada and Germany. Approximately $7.0 million, $5.1 million and $600,000
of interest income was earned during 2004, 2003 and 2002, respectively, in connection with these
loans. Loan Underwriting.Many of our loans are made to lower credit grade borrowers or the
property securing the loan has other factors such as debt-to-income ratios or property location that prevent the
borrower from obtaining a prime interest rate. We attempt to mitigate the risk associated with
these loans by charging higher interest rates and through our loan approval and loan purchasing
process. Initial loan review for potential applications is performed by the Regional Managers and
Area Manager of our loan production offices, in consultation with the Chief Underwriter, the
respective Deputy Chief Credit Officer, and the Vice Chairman/Chief Credit Officer. Our loan
underwriters are responsible for detailed reviews of borrowers, collateral, and loan terms, and
prepare a written presentation for every loan application submitted to its real estate loan
committee, which is comprised of the following Bank officers:  
    Chairman, President, and Chief Executive Officer
    Vice Chairman and Chief Credit Officer
    Senior Managing Director/Chief Lending Officer
    Senior Managing Director/Chief Banking Officer
    Managing Director/Business Credit
    Managing Director/Deputy Chief Credit Officer - Express Operations
    Managing Director/Deputy Chief Credit Officer  Commercial Real Estate Operations
    First Vice President/Manager Loan Underwriting
    First Vice President/Loan Administration The underwriting standards for loans secured by income producing real estate properties
consider the borrowers financial resources and ability to repay and the amount and stability of
cash flow, if any, from the underlying collateral, to be comparable in importance to the
loan-to-value ratio as a repayment source. All real estate secured loans over $2.0 million must be submitted to the loan committee for
approval. At least one loan committee member or designee must personally conduct on-site
inspections of any property involved in connection with a real estate loan recommendation of $1.0
million or more. Loans up to $750,000 may be approved by any loan committee member. Loans of
$750,000 to $1.5 million require approval by any two members of the Banks loan committee, while
loans in excess of $1.5 million require approval of three loan committee members. Additionally,
loans over $3.0 million require the additional signature of the Vice Chairman and Chief Credit
Officer; and individual loans over $5.0 million, loans resulting in an aggregate borrowing
relationship to one borrower in excess of $7.5 million, and all purchased loan pools must be
approved by the executive committee of the Banks Board of Directors. All franchise and film finance loans over $1.0 million are submitted to the business lending
loan committee for approval. All loans must be approved by the Managing Director/Business Credit
and loans over $3.0 million must be approved by the Vice Chairman and Chief Credit Officer.
Individual loans over $5.0 million, loans resulting in an aggregate borrowing relationship to one
borrower in excess of $7.5 million, and all purchased loan pools must be approved by the executive
committee of the Banks Board of Directors. Our loans are originated on both a non-recourse and full recourse basis and we generally seek
to obtain personal guarantees from the principals of borrowers which are single asset or limited
liability entities (such as partnerships, corporations or trusts). The maximum size of a single loan made by the Bank is limited by California law to 25% of the
Banks equity capital. At December 31, 2004, that limit was approximately $56.3 million. Our
largest combined credit extension to related borrowers was $31.4 million at December 31, 2004. At
December 31, 2004, we had a total of 238 extensions of credit, with a combined outstanding
principal balance of $635.4 million, that were over $5.0 million to a single borrower or related
borrowers. All combined extensions of credit over $5.0 million were performing in accordance with
their repayment terms. At December 31, 2004, we had 1,813 secured real estate loans outstanding,
with an average balance per loan of approximately $867,000. Servicing and Collections.Our loan portfolio is predominantly serviced by the Banks loan
servicing department, which is designed to provide prompt customer service, and accurate and timely
information for account follow-up, financial reporting and management review. We monitor
our loans to ensure that projects are performing as underwritten. This monitoring allows us
to take a proactive approach to addressing projects that do not perform as planned. When payments
are not received by their contractual due date, collection efforts begin on the fifth day of delinquency with a
telephone contact, and proceed to written notices that progress from reminders of the borrowers
payment obligation to an advice that a notice of default may be forthcoming. Accounts delinquent
for more than 30 days are generally transferred to the Banks asset management department which,
following a review of 6




---



##### Table of Contents



the account and management approval, implements a collection or restructure
plan, or a disposition strategy, and evaluates any potential loss exposure on the asset. Competition.Our competition in originating real estate, construction, franchise and film
finance loans is principally from community banks, savings and loan associations, industrial banks,
real estate financing conduits, specialty finance companies, small insurance companies, and larger
banks. Many of these entities enjoy competitive advantages over us relative to a potential borrower
in terms of a prior business relationship, wider geographic presence or more accessible branch
office locations, the ability to offer additional services or more favorable pricing alternatives,
or a lower cost of funds structure. We attempt to offset the potential effect of these factors by
providing borrowers with greater individual attention and a more flexible and time-sensitive
underwriting, approval and funding process than they might obtain elsewhere. Household Strategic Alliance Tax Refund Lending.In November 2002, we entered into a strategic business relationship with
various subsidiaries of Household relating to certain tax refund anticipation loans (RALs). In
connection with this relationship, the Bank originated RALs and sold to Household a non-recourse
participation interest representing substantially all of the outstanding loan balance. The Bank
also provided refund transfers to customers who did not want or did not qualify for loans. The
transfer product facilitates the receipt of the refund by the customer by authorizing the
customers tax preparer to print a check for the customer after the refund has been received by the
Bank from the IRS (RACs). The Banks revenue, under the program, consisted of RAL and RAC
transaction fees and the earnings stream from RALs originated under the program to the extent of
its retained interest in such RALs. Household supported our credit administration, compliance,
treasury and accounting functions with a range of services relating to the administration of this
lending program. The Bank would not have originated these loans without the involvement of Household or a
similar business partner. Because these programs related to the filing of income tax returns, activity was concentrated
in the first quarter of each year. This caused first quarter net income to become a greater
percentage of each years net income. This seasonality impacted a number of performance ratios,
including return on assets (ROA), return on equity (ROE) and the operating efficiency ratio. These
impacts are apparent in the first quarter of 2004 and 2003, as well as and the corresponding
year-to-date ratios in subsequent quarters. At December 31, 2004 and 2003, there were no RAL loans
outstanding. During 2004, subsequent to the tax filing season, Household and its affiliates terminated
their tax refund lending program with the Bank. Private Label Commercial Revolving Credit Loans. We also entered into an agreement in December
2002 with Household pursuant to which the Bank originated private label small commercial revolving
loans to small businesses. These loans were used primarily for purchases from major retailers.
Pursuant to this agreement, the Bank sold Household a non-recourse participation interest
representing substantially all of the outstanding loan balance. The Bank participated in the
earnings stream from the loans originated under the program to the extent of its retained interest
in such loans. At December 31, 2004 and 2003, our retained interest in commercial revolving credit
loans was none and $5.8 million, respectively. During 2004, Household and its affiliates terminated their private label commercial lending
program with the Bank. Imperial Capital Real Estate Investment Trust During 2000, we acquired all of the equity and certain collateralized mortgage obligations
(CMOs) of the ICCMAC Multi-family and Commercial Trust 1999-1 (ICCMAC Trust) through our real
estate investment trust subsidiary, Imperial Capital Real Estate Investment Trust (Imperial
Capital REIT). During 2004, the CMOs were retired and the ICCMAC
Trust was dissolved. The remaining outstanding loans were contributed to the Imperial Capital REIT.
At December 31, 2004, the Imperial Capital REIT held net real estate loans of $33.6 million,
comprised of approximately 62.2% and 37.8% of multi-family and commercial loans, respectively, with
over 44.4% of the loans secured by property located in California. Approximately two-thirds of the
loans are adjustable rate mortgages. The cash flow from the Imperial Capital REIT loan pool
provides cash flow on a monthly basis to ITLA Capital. ITLA Capital recorded $1.4 million of
pre-tax income from its investment in the Imperial Capital REIT during the year ended December 31,
2004. 7




---



##### Table of Contents



Nonperforming Assets and Other Loans of Concern At December 31, 2004, nonperforming assets totaled $14.7 million or 0.63% of total assets.
Nonperforming assets consisted entirely of nonaccrual loans. For additional information regarding
nonperforming assets see Item 7: Managements Discussion and Analysis of Financial Condition and
Results of Operations-Credit Risk Elements. As of December 31, 2004, we had loans with an aggregate outstanding balance of $37.1 million
with respect to which known information concerning possible credit problems with the borrowers or
the cash flows of the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan repayment terms, which may
result in the future inclusion of such loans in the non-accrual loan category. All of these loans
are classified as substandard pursuant to the regulatory guidelines discussed below. At December 31, 2004, there was no other real estate owned. Classified Assets Management uses a loan classification system consistent with the classification system used by
bank regulatory agencies to help it evaluate the risks inherent in its real estate loan portfolio.
Loans are identified as pass, substandard, doubtful or loss based upon consideration of all
sources of repayment, underlying collateral values, current and anticipated economic conditions,
trends and uncertainties, and historical experience. Pass loans are further divided into four
additional sub-categories, based on the borrowers financial strength and ability to service the
debt and/or the value and debt service coverage of the underlying collateral. Underlying collateral
values for real estate dependent loans are supported by property appraisals or evaluations. We
review our loan classifications on at least a quarterly basis. At December 31, 2004, we classified
$49.0 million of loans as substandard, $2.8 million as doubtful and none as loss of which,
$14.7 million of these classified loans were included in the nonperforming assets table in Item 7.
Managements Discussion and Analysis of Results of Financial Condition and Operations  Credit Risk
Elements. Funding Sources The primary source of funding for our lending operations and investments are deposits.
Our deposits are federally insured by the FDIC to the maximum extent permitted by law.
Approximately 82.0% of our deposits are term deposits that pay fixed rates of interest for
periods ranging from 90 days to five years, 12.0% of our deposits are variable rate passbook
accounts and variable rate money market accounts with limited checking features, and 6.0% are
customer demand deposit accounts. In connection with the Banks charter conversion in 2003, we expanded our line of banking
products and services offered to our customers. The new products and services consist of
commercial banking products and services, including consumer and business checking accounts. Our retail checking account balance was $85.9 million at December 31, 2004. As we continue to
expand and grow our retail deposit base, we anticipate that the Banks dependence on interest rate
sensitive certificates of deposit as a funding source will slowly diminish; however, in 2004, our deposit strategy continued to rely upon offering deposit rates significantly above those
customarily offered by other financial institutions in its market. We generally
accumulate deposits by relying on renewals of term accounts by existing depositors, participating
in deposit rate surveys which promote the rates offered by us on our deposit products, and
periodically advertising in various local market newspapers and other media. Management believes
that our deposits are a reliable funding source and that the cost of funds resulting from our
deposit gathering strategy is comparable to those of other banks pursuing a similar
strategy. However, because we compete for deposits primarily on the basis of rates, we
could experience difficulties in attracting deposits if we could not continue to offer deposit
rates at levels above those of other financial institutions. Management also believes that any
efforts to significantly increase the size of our deposit base may require greater marketing
efforts and/or increases in deposit rates. At December 31, 2004,
we had $100.0 million of
brokered deposits. For information concerning overall deposits outstanding during the periods indicated and the
rates paid thereon, see Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Net Interest Income. The Bank also uses advances from the FHLB of San Francisco and borrowings from other
unaffiliated financial institutions as funding sources. FHLB advances are collateralized by pledges
of qualifying cash equivalents, investment securities, mortgage-backed securities and loans. At
December 31, 2004, FHLB advances outstanding totaled $492.4 million, and the remaining available
borrowing capacity, based on the loans and securities pledged as collateral, totaled $193.7

million, net of the $9.5 million of additional FHLB Stock that we would be required to purchase to
support the additional borrowings. Additionally, the Bank has a $91.8 million repurchase agreement
borrowing from an unaffiliated financial institution that is secured by mortgage-backed securities.
The Bank also has uncommitted, unsecured lines of credit with other banks renewable daily in the
amount of $30.0 million and ITLA 8




---



##### Table of Contents



Capital has a $25.0 million revolving credit facility with an unaffiliated financial
institution. This revolving credit facility matures on April 30, 2005, which we intend on renewing
upon maturity. See Item 8. Financial Statements and Supplementary Data  Notes to Consolidated
Financial Statements  Notes 7, 8, and 10. Regulation On January 1, 2003, the Bank converted from a California industrial bank to a
California-chartered commercial bank, and the Company became a bank holding company. As a result,
ITLA Capital is now regulated by the Board of Governors of the Federal Reserve System (the Federal
Reserve Board). The Bank continues to be regulated by the California Department of Financial
Institutions (the DFI) and the Federal Deposit Insurance Corporation (the FDIC). Due to
legislation which became effective in October 2000, California industrial banks are now generally
subject to the same California banking laws as California commercial banks. Accordingly, the
regulatory oversight to which the Bank is now subject as a commercial bank is not significantly
different from the regulatory oversight to which it was subject as an industrial bank. Holding Company Regulation Bank holding companies are subject to comprehensive regulation by the Federal Reserve Board
under the Bank Holding Company Act of 1956, and the regulations of the Federal Reserve Board. As a
bank holding company, ITLA Capital is required to file reports with the Federal Reserve Board and
such additional information as the Federal Reserve Board may require, and ITLA Capital and its
non-bank subsidiaries are subject to examination by the Federal Reserve Board. The Federal Reserve
Board also has extensive enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist or removal orders
and to require that a bank holding company divest subsidiaries, including its bank subsidiaries. In
general, enforcement actions may be initiated for violations of law and regulation as well as
unsafe or unsound practices. Under Federal Reserve Board policy, a bank holding company must serve as a source of strength
for its subsidiary banks. Under this policy, the Federal Reserve Board may require, and has
required in the past, bank holding companies to contribute additional capital to undercapitalized
subsidiary banks. Under the Bank Holding Company Act of 1956, a bank holding company must obtain Federal Reserve
Board approval before, among other matters:  
    acquiring, directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after the acquisition, it would own or control more than 5%
of these shares (unless it already owns or controls a majority of these shares);
    acquiring all or substantially all of the assets of another bank or bank holding company; or
    merging or consolidating with another bank holding company. This statute also prohibits a bank holding company, with certain exceptions, from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of any company which
is not a bank or bank holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for its subsidiaries.
The principal exceptions to these prohibitions involve certain non-bank activities which have been
identified as activities closely related to the business of banking or managing or controlling
banks. Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Boards view that a bank
holding company should pay cash dividends only to the extent that its net income for the past year
is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent
with the bank holding companys capital needs, asset quality and overall financial condition.
Furthermore, under its source of strength doctrine, the Federal Reserve Board expects a bank
holding company to serve as a source of financial strength for its bank subsidiaries, which could
limit the ability of a holding company to pay dividends if a bank subsidiary did not have
sufficient capital. Repurchase or Redemption of Equity Securities.A bank holding company is required to give the
Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12 months, is equal
to 10% or more of its consolidated net worth. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve 9




---



##### Table of Contents



Board order, or any condition imposed by, or written agreement with, the Federal Reserve
Board. This notification requirement does not apply to any company that meets the well-capitalized
standard for bank holding companies, has a safety and soundness examination rating of at least a
2 and is not subject to any unresolved supervisory issues. Regulatory Capital Requirements.The Federal Reserve has established risk-based
measures and a leverage measure of capital adequacy for bank holding companies. ITLA Capital was not
subject to any minimum capital requirements prior to becoming a bank holding company. The risk-based capital standards are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies, to account for
off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and
off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum ratio of total capital to risk-weighted assets is 8.0%. Total capital consists of
two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common
shareholders equity, including retained earnings, noncumulative perpetual preferred stock, certain
trust preferred securities and minority interest in equity accounts of fully consolidated
subsidiaries, less goodwill and other specified intangible assets. Tier 1 capital must equal at
least 4.0% of risk-weighted assets. Tier 2 capital generally consists of subordinated debt and
other hybrid capital instruments, other preferred stock, a limited amount of loan loss reserves and
a limited amount of unrealized holding gains on equity securities. The total amount of Tier 2
capital is limited to 100% of Tier 1 capital. At December 31, 2004, our ratio of total capital to
risk-weighted assets was 16.0% and our ratio of Tier 1 capital to risk-weighted assets was 13.7%. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank
holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average
assets, less goodwill and other specified intangible assets, of 3.0% for certain bank holding
companies that meet specified criteria, including having the highest regulatory rating and
implementing the Federal Reserves risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at least 4.0%. At
December 31, 2004, ITLA Capitals required Tier 1 capital ratio was 4.0% and its actual Tier 1
capital was 12.3%. ITLA
Capital currently is deemed well capitalized under the Federal Reserve Board capital
requirements. To be well capitalized, a bank holding company must have a ratio of total capital to
risk weighted assets of at least 10% and a ratio of Tier 1 capital to risk weighted assets of at
least 6.0%. Failure to meet capital guidelines could subject a bank or bank holding company to a variety
of enforcement remedies, including issuance of a capital directive, the termination of deposit
insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its
business. As described below, significant additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. Bank Regulation  California Law The regulations of the DFI govern most aspects of the Banks businesses and operations,
including, but not limited to, the scope of its business, investments, the nature and amount of any
collateral for loans, the issuance of securities, the payment of dividends, bank expansion and bank
activities. The DFIs supervision of the Bank includes comprehensive reviews of all aspects of the
Banks business and condition, and the DFI possesses broad remedial enforcement authority to
influence the Banks operations, both formally and informally. Bank Regulation  Federal Law Because our deposits are insured by the Bank Insurance Fund of the FDIC, the FDIC, in addition
to the DFI, also broadly regulates the Bank. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports, and generally supervises the
operations of institutions to which it provides deposit insurance. The FDIC is also the federal
agency charged with regulating state-chartered banks that are not members of the Federal Reserve
System, such as the Bank. Insured depository institutions, and their institution-affiliated
parties, may be subject to potential enforcement actions by the FDIC and the DFI for unsafe or
unsound practices in conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the agency. Management
is not aware of any pending or threatened enforcement actions against the Bank. 10




---



##### Table of Contents



Regulatory Capital Requirements.Federally-insured, state-chartered banks such as the Bank,
are required to maintain minimum levels of regulatory capital as specified in the FDICs capital
maintenance regulations. The FDIC also is authorized to impose capital requirements in excess of
these standards on individual banks on a case-by-case basis. The Bank is required to comply with three separate minimum capital requirements: a tier 1
capital ratio and two risk-based capital requirements. Tier 1 capital generally includes
common shareholders equity, including retained earnings, qualifying noncumulative perpetual
preferred stock and any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangible assets, other than properly valued purchased mortgage
servicing rights up to certain specified limits and less net deferred tax assets in excess of
certain specified limits. Tier 1 Capital Ratio.FDIC regulations establish a minimum 3.0% ratio of tier 1 capital to
total average assets for the most highly-rated state-chartered, FDIC-supervised banks. All other
FDIC supervised banks must maintain at least a 4.0% tier 1 capital ratio. At December 31, 2004, the
Banks required minimum tier 1 capital ratio was 4.0% and its actual tier 1 capital ratio was
11.0%. Risk-Based Capital Requirements.The risk-based capital requirements generally require the
Bank to maintain a ratio of tier 1 capital to risk-weighted assets of at least 4.0% and a ratio of
total risk-based capital to risk-weighted assets of at least 8.0%. To calculate the amount of
capital required, assets are placed in one of four categories and given a percentage weight (0%,
20%, 50% or 100%) based on the relative risk of the category. For example, United States Treasury
Bills and Ginnie Mae securities are placed in the 0% risk category. Fannie Mae and Freddie Mac
securities are placed in the 20% risk category, loans secured by one-to four-family residential
properties and certain privately-issued mortgage-backed securities are generally placed in the 50%
risk category, and commercial and consumer loans and other assets are generally placed in the 100%
risk category. In addition, certain off-balance-sheet items are converted to balance sheet credit
equivalent amounts and each amount is then assigned to one of the four categories. For purposes of the risk-based capital requirements, total capital means tier 1 capital plus
supplementary or tier 2 capital, so long as the amount of supplementary or tier 2 capital that is
used to satisfy the requirement does not exceed the amount of tier 1 capital. Tier 2 capital
includes cumulative and certain other perpetual preferred stock, mandatory convertible subordinated
debt and perpetual subordinated debt, mandatory redeemable preferred stock, intermediate-term
preferred stock, mandatory convertible subordinated debt and subordinated debt, the allowance for
loan losses up to a maximum of 1.25% of risk-weighted assets and a limited amount of unrealized
holding gains on securities. At December 31, 2004 the Banks tier 1 risk-based and total capital
ratios were 12.2% and 13.5%, respectively. The federal banking agencies have adopted regulations specifying that the agencies will
include, in their evaluation of a banks capital adequacy, an assessment of the exposure to
declines in the economic value of the banks capital due to changes in interest rates. The FDIC and
the other federal banking agencies have also promulgated final amendments to their respective
risk-based capital requirements which identify concentration of credit risk and certain risks
arising from nontraditional activities, and the management of such risk, as important factors to
consider in assessing an institutions overall capital adequacy. The FDIC may require higher
minimum capital ratios based on certain circumstances, including where the institution has
significant risks from concentration of credit or certain risks arising from nontraditional
activities. Prompt Corrective Action Requirements.The FDIC has implemented a system requiring regulatory
sanctions against state-chartered banks that are not adequately capitalized, with the sanctions
growing more severe the lower the institutions capital. The FDIC has established specific capital
ratios for five separate capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized. An institution is treated as well capitalized if its total risk based capital ratio is 10.0%
or more, its tier 1 risk-based ratio is 6.0% or more, its tier 1 capital ratio is 5.0% or greater,
and it is not subject to any order or directive by the FDIC to meet a specific capital level. The
Bank exceeded these requirements at December 31, 2004. The FDIC is authorized and, under certain circumstances, required to take certain actions
against institutions that fail to meet their capital requirements. The FDIC is generally required
to take action to restrict the activities of an undercapitalized institution. Any such
institution must submit a capital restoration plan and, until such plan is approved by the FDIC,
may not increase its assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The capital restoration plan must
include a limited guaranty by the institutions holding company. In addition, the FDIC must appoint a receiver or conservator for an institution, with certain
limited exceptions, within 90 days after it becomes critically undercapitalized. The FDIC is also generally authorized to reclassify an institution into a lower capital
category and impose the restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound condition. 11




---



##### Table of Contents



Community Reinvestment Act and Fair Lending Requirements.The Bank is subject to certain fair
lending requirements and reporting obligations involving lending operations and Community
Reinvestment Act activities. Federal banking agencies are required to evaluate the record of
financial institutions in meeting the credit needs of their local communities, including low and
moderate income neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal banking agencies take
compliance with such laws into account when regulating and supervising other activities such as
mergers and acquisitions. In its most recent examination, the FDIC rated the Bank satisfactory in
complying with its Community Reinvestment Act obligations. Fiscal and Monetary Policies.Our business and earnings are affected significantly by the
fiscal and monetary policies of the federal government and its agencies. We are particularly
affected by the policies of the Federal Reserve Board, which regulates the supply of money and
credit in the United States. Among the instruments of monetary policy available to the Federal
Reserve Board are (a) conducting open market operations in United States government securities; (b)
changing the discount rates of borrowings of depository institutions, (c) imposing or changing
reserve requirements against depository institutions deposits, and (d) imposing or changing
reserve requirements against certain borrowings by banks and their affiliates. These methods are
used in varying degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the
Federal Reserve Board may have a material effect on the Companys business, results of operations
and financial condition. Privacy Provisions.Banking regulators, as required under the Gramm-Leach-Bliley Act (GLB
Act), have adopted rules limiting the ability of banks and other financial institutions to
disclose nonpublic information about consumers to nonaffiliated third parties. The rules generally
require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to
prevent disclosure of certain personal information to nonaffiliated third parties. The privacy
provisions of the GLB Act affect how consumer information is transmitted through diversified
financial services companies and conveyed to outside vendors. The state of California has adopted The California Financial Information Privacy Act (CFPA),
which took effect in 2004. The CFPA requires a financial institution to provide specific
information to a consumer related to the sharing of that consumers nonpublic personal information.
A consumer may direct the financial institution not to share his or her nonpublic personal
information with affiliated or nonaffiliated companies with which a financial institution has
contracted to provide financial products and services, and requires permission from the consumer be
acquired by a financial institution prior to sharing such information. These provisions are more
restrictive than the privacy provisions of the GLB Act. In December 2003, the U.S. Congress adopted, and President Bush signed, the Fair and Accurate
Transactions Act (the FACT Act). One of the provisions of the FACT Act provides that, when the
implementing regulations have been issued and become effective, the FACT Act will preempt elements
of the CFPA. The FACT Act requires the Federal Reserve Board and the Federal Trade Commission to
issue final regulations within nine months of the effectiveness of the FACT Act, and that those
regulations must become effective within six months of issuance. The provisions of the regulations
that will implement the FACT Act, and the timing of their effect on the Bank, cannot be determined
at this time. Future Legislation.Various legislation, including proposals to change substantially the
financial institution regulatory system, is from time to time introduced in Congress. This
legislation may change banking statutes and our operating environment in substantial and
unpredictable ways. If enacted, this legislation could increase or decrease the cost of doing
business, limit or expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. We cannot predict whether
any of this potential legislation will be enacted and, if enacted, the effect that it, or any
implementing regulations, would have on our business, results of operations or financial condition. Employees As of December 31, 2004, we had 250 employees. Management believes that its relations with
employees are satisfactory. We are not subject to any collective bargaining agreements. 12




---



##### Table of Contents



Segment Reporting Financial and other information regarding our operating segments is contained in Note 19 to
our audited consolidated financial statements included in Item 8 of this report. Internet Website We maintain a website with the address www.itlacapital.com. The information contained on our
website is not included as a part of, or incorporated by reference into, this Annual Report on Form
10-K. Other than an investors own Internet access charges, we make available free of charge
through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we
have electronically filed such material with, or furnished such material to, the Securities and
Exchange Commission. 
 Item 2. Properties The following sets forth the Companys material facilities as of December 31, 2004. Year Current LeaseLocations
    
    Office Uses
    
    Square Footage
    
    Term ExpiresLa Jolla, CA
    
    Corporate Headquarters
    
    
    17,419
    
    
    
    2008La Jolla, CA
    
    Administrative and Marketing
    
    
    2,325
    
    
    
    2006Glendale, CA
    
    Loan Administration/Asset Management/Bank Branch
    
    
    6,257
    
    
    
    2006Glendale, CA
    
    Loan Operations Division/Real Estate Lending
    
    
    8,932
    
    
    
    2005Glendale, CA
    
    Operation Support
    
    
    6,342
    
    
    
    2006Costa Mesa, CA
    
    Bank Branch/Real Estate Lending
    
    
    3,609
    
    
    
    2006San Francisco, CA
    
    Bank Branch/Real Estate Lending
    
    
    5,005
    
    
    
    2007Beverly Hills, CA
    
    Bank Branch
    
    
    2,218
    
    
    
    2005Encino, CA
    
    Bank Branch/Real Estate Lending
    
    
    5,145
    
    
    
    2009San Diego, CA
    
    Bank Branch/Real Estate Lending
    
    
    3,046
    
    
    
    2010Santa Monica, CA
    
    Loan Operations/Real Estate Lending
    
    
    11,490
    
    
    
    2009Walnut Creek, CA
    
    Real Estate Lending
    
    
    2,220
    
    
    
    2007Century City, CA
    
    ICB Entertainment Finance
    
    
    7,003
    
    
    
    2008Carson City, NV
    
    Bank Branch
    
    
    3,000
    
    
    
    2007Tempe, AZ
    
    Franchise and Real Estate Lending Operations
    
    
    3,920
    
    
    
    2005Boston, MA
    
    Real Estate Lending
    
    
    3,309
    
    
    
    2007
 For additional information regarding our premises, see Item 8. Financial Statements and
Supplementary Data  Notes to Consolidated Financial Statements  Note 6. Management believes that our present facilities are adequate for its current needs,
and that alternative or additional space, if necessary, will be available on reasonable terms. 
 Item 3. Legal Proceedings We are party to certain legal proceedings incidental to our business. Management believes that
the outcome of such proceedings, in the aggregate, will not have a material effect on our business,
financial condition or results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the quarter ended December 31, 2004. 13




---



##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities ITLA
Capitals common stock is traded on the NASDAQ National Market system under the symbol ITLA. As of
March 14, 2005, there were 113 holders of record of ITLA
Capitals common stock representing an estimated 1,400
beneficial shareholders with a total of 5,797,224 shares outstanding. We have not paid any cash
dividends since our holding company reorganization in 1996. As a bank
holding company, ITLA Capitals ability
to pay dividends may be affected by regulations, including those governing the payment of dividends
by the Bank to ITLA Capital, which could be a source of funds for any
dividends paid by ITLA Capital,
as well as by the policies of the Federal Reserve Board. See Item 1. BusinessRegulation and
Note 16 to our consolidated financial statements included in Item 8 of this report. The following table sets forth, for the periods indicated, the range of high and low trade
prices for ITLA Capitals common stock. Stock price data on NASDAQ reflects inter-dealer prices, without
retail mark-up, mark-down or commission. Market Price
    
    
    Average DailyHigh
    
    
    Low
    
    
    Close
    
    
    Closing Price20044th Quarter
    
    $
    58.81
    
    
    $
    44.14
    
    
    $
    58.79
    
    
    $
    51.793rd Quarter
    
    
    46.97
    
    
    
    37.73
    
    
    
    46.20
    
    
    
    41.452nd Quarter
    
    
    50.00
    
    
    
    36.70
    
    
    
    40.41
    
    
    
    42.641st Quarter
    
    
    50.81
    
    
    
    44.52
    
    
    
    49.23
    
    
    
    48.6120034th Quarter
    
    $
    51.10
    
    
    $
    44.16
    
    
    $
    50.10
    
    
    $
    48.023rd Quarter
    
    
    45.23
    
    
    
    40.20
    
    
    
    42.64
    
    
    
    42.772nd Quarter
    
    
    40.09
    
    
    
    32.98
    
    
    
    40.09
    
    
    
    37.071st Quarter
    
    
    35.29
    
    
    
    31.23
    
    
    
    33.04
    
    
    
    33.18
 The following table includes supplementary quarterly operating results and per share
information for the past two years. The data presented should be read along with Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations and with
Item 8. Financial Statements and Supplementary Data included elsewhere in this report. Quarterly Operations (Unaudited) For the Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(in thousands except per share amounts)2004Interest income
    
    $
    32,083
    
    
    $
    28,188
    
    
    $
    30,678
    
    
    $
    34,005Interest expense
    
    
    9,146
    
    
    
    8,819
    
    
    
    10,544
    
    
    
    12,909Net interest income before provision for loan losses
    
    
    22,937
    
    
    
    19,369
    
    
    
    20,134
    
    
    
    21,096Provision for loan losses
    
    
    1,400
    
    
    
    950
    
    
    
    1,100
    
    
    
    1,275Non-interest income
    
    
    13,394
    
    
    
    1,045
    
    
    
    (165
    )
    
    
    234General and administrative expense
    
    
    11,352
    
    
    
    10,488
    
    
    
    9,881
    
    
    
    10,313Total real estate owned expense, net
    
    
    1,057
    
    
    
    (330
    )
    
    
    (29
    )
    
    
    14Provision for income taxes
    
    
    8,738
    
    
    
    3,676
    
    
    
    3,519
    
    
    
    4,015Net income
    
    
    13,784
    
    
    
    5,630
    
    
    
    5,498
    
    
    
    5,713Basic earnings per share
    
    $
    2.21
    
    
    $
    0.91
    
    
    $
    0.91
    
    
    $
    0.98Diluted earnings per share
    
    $
    2.07
    
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.932003Interest income
    
    $
    33,524
    
    
    $
    27,911
    
    
    $
    27,075
    
    
    $
    27,467Interest expense
    
    
    8,433
    
    
    
    7,873
    
    
    
    7,115
    
    
    
    7,446Net interest income before provision for loan losses
    
    
    25,091
    
    
    
    20,038
    
    
    
    19,960
    
    
    
    20,021Provision for loan losses
    
    
    4,500
    
    
    
    1,850
    
    
    
    750
    
    
    
    660Non-interest income
    
    
    12,536
    
    
    
    1,241
    
    
    
    777
    
    
    
    686General and administrative expense
    
    
    10,117
    
    
    
    8,917
    
    
    
    8,958
    
    
    
    8,723Total real estate owned expense, net
    
    
    143
    
    
    
    51
    
    
    
    609
    
    
    
    409Provision for income taxes
    
    
    8,326
    
    
    
    3,525
    
    
    
    3,473
    
    
    
    3,622Net income
    
    
    13,022
    
    
    
    5,490
    
    
    
    5,406
    
    
    
    5,716Basic earnings per share
    
    $
    2.17
    
    
    $
    0.91
    
    
    $
    0.90
    
    
    $
    0.94Diluted earnings per share
    
    $
    2.02
    
    
    $
    0.85
    
    
    $
    0.83
    
    
    $
    0.87
 14




---



##### Table of Contents



Stock Repurchases The following table sets forth the repurchases of our common stock for the fiscal quarter
ended December 31, 2004. Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetPart of Publicly
    
    
    Be Purchased UnderTotal Number of
    
    
    Average Price
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    Programs(1)October 1, 2004 to
October 31, 2004
    
    
    42,700
    
    
    $
    47.78
    
    
    
    42,700
    
    
    
    249,865November 1, 2004 to
November 30, 2004
    
    
    95,500
    
    
    
    51.62
    
    
    
    95,500
    
    
    
    154,365December 1, 2004 to
December 31, 2004
    
    
    49,273
    
    
    
    55.57
    
    
    
    49,273
    
    
    
    105,092Total
    
    
    187,473
    
    
    $
    51.78
    
    
    
    187,473
    
    
    
    105,092
   (1)
    
    The repurchases during October, November and December 2004 were made under the ninth
extension of our stock repurchase program, which was announced on September 30, 2004. The
extension authorized the repurchase of an additional 5% of the outstanding shares as of the
authorization date. At December 31, 2004, 105,092 shares remained available for repurchase
under the ninth extension. Subsequent to December 31, 2004, the tenth extension to the stock
repurchase program for up to 5% of ITLA Capitals outstanding shares of common stock was announced. 
 Item 6. Selected Financial Data The following condensed consolidated statements of operations and financial condition and
selected performance ratios as of December 31, 2004, 2003, 2002, 2001, and 2000 and for the years
then ended have been derived from our audited consolidated financial statements. The information
below is qualified in its entirety by the detailed information included elsewhere herein and should
be read along with Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations and Item 8. Financial Statement and Supplementary Data. As of and for the years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands except per share amount)Condensed Consolidated Statements of OperationsTotal interest income
    
    $
    124,954
    
    
    $
    115,977
    
    
    $
    110,608
    
    
    $
    123,095
    
    
    $
    123,775Total interest expense
    
    
    41,418
    
    
    
    30,867
    
    
    
    37,322
    
    
    
    63,863
    
    
    
    68,642Net interest income before provisions for loan losses
    
    
    83,536
    
    
    
    85,110
    
    
    
    73,286
    
    
    
    59,232
    
    
    
    55,133Provision for loan losses
    
    
    4,725
    
    
    
    7,760
    
    
    
    9,030
    
    
    
    4,575
    
    
    
    4,775Net interest income after provision for loan losses
    
    
    78,811
    
    
    
    77,350
    
    
    
    64,256
    
    
    
    54,657
    
    
    
    50,358Non-interest income
    
    
    14,508
    
    
    
    15,240
    
    
    
    373
    
    
    
    1,059
    
    
    
    2,331Non-interest expense:Compensation and benefits
    
    
    21,444
    
    
    
    18,870
    
    
    
    13,954
    
    
    
    11,778
    
    
    
    9,958Occupancy and equipment
    
    
    5,924
    
    
    
    4,839
    
    
    
    3,165
    
    
    
    2,968
    
    
    
    2,567Other general and administrative expenses
    
    
    14,666
    
    
    
    13,006
    
    
    
    9,913
    
    
    
    8,072
    
    
    
    9,529
    (1)Real estate owned expense, net
    
    
    712
    
    
    
    1,212
    
    
    
    1,323
    
    
    
    387
    
    
    
    138Total non-interest expense
    
    
    42,746
    
    
    
    37,927
    
    
    
    28,355
    
    
    
    23,205
    
    
    
    22,192Income before provision for income taxes and minority interest in
income of subsidiary
    
    
    50,573
    
    
    
    54,663
    
    
    
    36,274
    
    
    
    32,511
    
    
    
    30,497Minority interest in income of subsidiary(2)(3)
    
    
    
    
    
    
    6,083
    
    
    
    3,481
    
    
    
    2,967
    
    
    
    478Income before provision for income taxes
    
    
    50,573
    
    
    
    48,580
    
    
    
    32,793
    
    
    
    29,544
    
    
    
    30,019Provision for income taxes
    
    
    19,948
    
    
    
    18,946
    
    
    
    12,788
    
    
    
    11,393
    
    
    
    11,880NET INCOME
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005
    
    
    $
    18,151
    
    
    $
    18,139BASIC EARNINGS PER SHARE
    
    $
    5.04
    
    
    $
    4.91
    
    
    $
    3.35
    
    
    $
    2.82
    
    
    $
    2.57DILUTED EARNINGS PER SHARE
    
    $
    4.75
    
    
    $
    4.55
    
    
    $
    3.16
    
    
    $
    2.72
    
    
    $
    2.51Dividends paid
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 15




---



##### Table of Contents



As of and for the years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands except per share amount)Condensed Consolidated Statements of Financial ConditionCash and cash equivalents
    
    $
    87,580
    
    
    $
    178,318
    
    
    $
    160,848
    
    
    $
    134,241
    
    
    $
    70,950Investment securities available for sale, at fair value
    
    
    66,845
    
    
    
    53,093
    
    
    
    54,677
    
    
    
    29,411
    
    
    
    46,325Investment securities held-to-maturity, at amortized cost
    
    
    296,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock in Federal Home Loan Bank
    
    
    23,200
    
    
    
    17,966
    
    
    
    16,934
    
    
    
    13,464
    
    
    
    3,963Loans, net
    
    
    1,793,815
    
    
    
    1,505,424
    
    
    
    1,438,234
    
    
    
    1,284,528
    
    
    
    1,257,649Interest receivable
    
    
    10,695
    
    
    
    8,958
    
    
    
    9,158
    
    
    
    11,144
    
    
    
    11,821Other real estate owned, net
    
    
    
    
    
    
    7,048
    
    
    
    12,593
    
    
    
    13,741
    
    
    
    2,250Premises and equipment, net
    
    
    6,645
    
    
    
    5,766
    
    
    
    4,197
    
    
    
    2,177
    
    
    
    2,690Deferred income taxes
    
    
    10,468
    
    
    
    11,609
    
    
    
    13,822
    
    
    
    11,869
    
    
    
    11,302Goodwill
    
    
    3,118
    
    
    
    3,118
    
    
    
    3,118
    
    
    
    
    
    
    
    Other assets
    
    
    19,677
    
    
    
    26,915
    
    
    
    8,384
    
    
    
    7,733
    
    
    
    8,193Total Assets
    
    $
    2,318,071
    
    
    $
    1,818,215
    
    
    $
    1,721,965
    
    
    $
    1,508,308
    
    
    $
    1,415,143Deposit accounts
    
    $
    1,432,032
    
    
    $
    1,147,017
    
    
    $
    1,065,911
    
    
    $
    953,654
    
    
    $
    1,015,699Collateralized mortgage obligations
    
    
    
    
    
    
    15,868
    
    
    
    69,077
    
    
    
    109,648
    
    
    
    161,852Federal Home Loan Bank advances and other borrowings
    
    
    584,224
    
    
    
    362,135
    
    
    
    338,685
    
    
    
    269,285
    
    
    
    79,250Account payable and other liabilities
    
    
    20,491
    
    
    
    19,696
    
    
    
    10,006
    
    
    
    9,674
    
    
    
    11,269Junior subordinated debentures (3)
    
    
    86,600
    
    
    
    86,600
    
    
    
    
    
    
    
    
    
    
    
    Guaranteed preferred beneficial interests in the Companys junior
subordinated deferrable interest debentures (3)
    
    
    
    
    
    
    
    
    
    
    81,595
    
    
    
    28,118
    
    
    
    13,519Shareholders equity
    
    
    194,724
    
    
    
    186,899
    
    
    
    156,691
    
    
    
    137,929
    
    
    
    133,554Total Liabilities and Shareholders Equity
    
    $
    2,318,071
    
    
    $
    1,818,215
    
    
    $
    1,721,965
    
    
    $
    1,508,308
    
    
    $
    1,415,143Book value per share
    
    $
    35.09
    
    
    $
    31.30
    
    
    $
    27.11
    
    
    $
    23.54
    
    
    $
    20.05
   (1)
    
    Includes non-recurring expenses of $1,400 related to the consolidation of the Banks
headquarters with ITLA Capitals headquarters in La Jolla, California.(2)
    
    Represents accrued distributions payable on our trust preferred securities.(3)
    
    As a result of our adoption of revised Financial Interpretation No. 46 issued by the
Financial Accounting Standards Board at December 31, 2003, we de-consolidated our trust
subsidiaries which issued our trust preferred securities. The effect of this was to recognize
investments in our trust subsidiaries in other assets, to report the amount of junior
subordinated debentures we issued to these trusts as a liability in our consolidated balance
sheets and, beginning on the date of adoption, to recognize the interest expense on the junior
subordinated debentures in our consolidated statements of income. Prior to the
de-consolidation, we reported our trust preferred securities in the mezzanine section of our
balance sheet as guaranteed preferred beneficial interests in the Companys junior
subordinated deferrable interest debentures and recognized distributions paid to the holders
of the trust preferred securities as minority interest in income of subsidiary in our
consolidated statement of income. See Note 1 to our consolidated financial statements
included in Item 8 of this report for further discussion. As of and for the years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Selected Performance RatiosReturn on average assets
    
    
    1.47
    %
    
    
    1.71
    %
    
    
    1.41
    %
    
    
    1.32
    %
    
    
    1.47
    %Return on average shareholders equity
    
    
    15.44
    %
    
    
    16.88
    %
    
    
    13.56
    %
    
    
    13.28
    %
    
    
    13.95
    %Net interest margin (1)
    
    
    4.12
    %
    
    
    5.03
    %
    
    
    5.30
    %
    
    
    4.33
    %
    
    
    4.47
    %Average interest earning assets to average
interest bearing liabilities
    
    
    127.50
    %
    
    
    135.03
    %
    
    
    113.94
    %
    
    
    113.80
    %
    
    
    113.49
    %Efficiency ratio (2)
    
    
    43.60
    %
    
    
    37.79
    %
    
    
    38.50
    %
    
    
    38.49
    %
    
    
    38.62
    %Total recurring general and administrative
expense to average assets
    
    
    2.02
    %
    
    
    2.29
    %
    
    
    1.90
    %
    
    
    1.66
    %
    
    
    1.78
    %Average shareholders equity to average assets
    
    
    9.51
    %
    
    
    11.16
    %
    
    
    10.36
    %
    
    
    9.93
    %
    
    
    10.86
    %Nonperforming assets to total assets
    
    
    0.63
    %
    
    
    0.86
    %
    
    
    1.08
    %
    
    
    1.92
    %
    
    
    1.44
    %Allowance for loan losses to loans held for
investment, net (3)
    
    
    1.94
    %
    
    
    2.14
    %
    
    
    2.31
    %
    
    
    2.16
    %
    
    
    2.12
    %Allowance for loan loss to nonaccrual loans
    
    
    242.17
    %
    
    
    392.26
    %
    
    
    555.61
    %
    
    
    174.30
    %
    
    
    149.85
    %Net charge-offs (recoveries) to average loans
held for investment, net
    
    
    0.16
    %
    
    
    0.52
    %
    
    
    0.36
    %
    
    
    0.39
    %
    
    
    0.18
    %
   (1)
    
    Net interest margin represents net interest income divided by total average interest-earning
assets. 16




---



##### Table of Contents



(2)
    
    Efficiency ratio represents non-interest expense divided by non-interest income and net
interest income before provision for loan losses.(3)
    
    Loans before allowance for loan losses and net of unearned finance charges and loan fees. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Application of Critical Accounting Policies and Accounting Estimates The accounting and reporting policies followed by us conform, in all material respects, to
accounting principles generally accepted in the United States and to general practices within the
financial services industry. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
While we base our estimates on historical experience, current information and other factors deemed
to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the
accounting estimate requires management to make assumptions about matters that are highly uncertain
and (ii) different estimates that management reasonably could have used for the accounting estimate
in the current period, or changes in the accounting estimate that are reasonably likely to occur
from period to period, could have a material impact on our financial statements. Accounting polices
related to the allowance for loan losses are considered to be critical, as these policies involve
considerable subjective judgment and estimation by management. We also consider accounting policies
related to stock-based compensation to be critical due to the continuously evolving standards,
changes to which could materially impact the way we account for stock options. We also consider our
accounting polices related to other real estate owned to be critical due to the potential
significance of these activities and the estimates involved. Critical accounting policies, and our
procedures related to these policies, are described in detail below. Also see Note 1  Organization
and Summary of Significant Accounting Policies in the accompanying notes to the consolidated
financial statements included elsewhere in this report. Allowance for Loan Losses (ALL).Our management assesses the adequacy of the ALL prior to
the end of each calendar quarter. This assessment includes procedures to estimate the allowance
and test the adequacy and appropriateness of the resulting balance. We establish the ALL amount separately for two different risk groups (1) individual loans
(loans with specifically identifiable risks); and (2) homogeneous loans (groups of loan with
similar characteristics). We base the allocation for individual loans primarily on risk rating
grades assigned to each of these loans as a result of our loan management and review processes. We
then assign each risk-rating grade a loss ratio, which is determined based on the experience of
management and our independent loan review process. We estimate losses on impaired loans based on
estimated cash flows discounted at the loans original effective interest rate or based on the
underlying collateral value. Based on managements experience, we also assign loss ratios to groups
of loans. These loss ratios are assigned to the various homogenous categories of the portfolio. The
level of the allowance also reflects managements continuing
evaluation of geographic and credit concentrations, specific credit risks, loan loss experience, current loan portfolio quality,
present economic, political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Companys
control, including the performance of our loan portfolio, the economy, changes in interest
rates and the view of the regulatory authorities toward loan classifications. We test the ALL balance by comparing the balance in the ALL to historical trends and peer
information. Our management then evaluates the result of the procedures performed, including the
result of our testing, and concludes on the appropriateness of the balance of the ALL in its
entirety. See the section captioned Allowance for Loan Losses and Nonperforming Assets elsewhere
in this discussion for further details of the risk factors considered by management in estimating
the necessary level of the allowance for loan losses. Stock-based Compensation.We currently account for stock-based employee compensation plans
based on the intrinsic value method provided in Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related Interpretations. Because the exercise
price of our employee and director stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized on options granted. SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, requires
pro forma disclosures of net income and earnings per share for companies not adopting its fair
value accounting method for stock-based employee compensation. 17




---



##### Table of Contents



The pro forma disclosures presented in Note 1  Organization and Summary of Significant
Accounting Policies in the accompanying notes to consolidated financial statements included
elsewhere in this report use the fair value method of SFAS No. 123 to measure compensation expense
for stock-based employee compensation plans. The fair value of stock options granted was estimated
at the date of grant using the Black-Scholes option-pricing model. This model was developed for use
in estimating the fair value of publicly traded options that have no vesting restrictions and are
fully transferable. Additionally, the model requires the input of highly subjective assumptions.
Because our employee and director stock options have characteristics significantly different from
those of publicly traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the Black-Scholes
option-pricing model does not necessarily provide a reliable single measure of the fair value of
our employee stock options. Other Real Estate Owned.Properties acquired through foreclosure, or in lieu of foreclosure,
are transferred to the other real estate owned portfolio and initially recorded at estimated fair
value less the estimated costs to sell the property. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of cost or estimated
fair value less the estimated costs of disposition. The fair value of other real estate owned is
generally determined from appraisals obtained from independent appraisers. Adoption and Pending Adoption of Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R)
supersedes APB No. 25, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees
and directors, including grants of employee and director stock options, to be recognized in the
financial statements based on their fair values (i.e., pro forma disclosure is no longer an
alternative to financial statement recognition). SFAS No. 123(R) is effective for public companies
at the beginning of the first interim or annual period beginning after June 15, 2005. We will
transition to fair value based accounting for stock-based compensation using a modified version of
prospective application (modified prospective application). Under modified prospective
application, as it is applicable to us, SFAS 123(R) applies to new awards and to awards modified,
repurchased, or cancelled after July 1, 2005. Additionally, compensation cost for the portion of
awards for which the requisite service has not been rendered (generally referring to non-vested
awards) that are outstanding as of July 1, 2005 must be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption of SFAS 123(R). The
attribution of compensation cost for those earlier awards will be based on the same method and on
the same grant-date fair values previously determined for the pro forma disclosures required for
companies that did not adopt the fair value accounting method for stock-based employee
compensation. Management is currently evaluating the effect of the adoption of SFAS No. 123(R) and
can not currently quantify the impact, if any, on our results of operations or financial position.
Future levels of compensation cost recognized related to stock-based compensation awards may be
impacted by new awards and/or modifications, repurchases and cancellations of existing awards
before and after the adoption of this standard. Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments provides guidance for determining when an investment is
considered impaired, whether impairment is other-than-temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment is less than its
cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the
ability and intent to hold an investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence
indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then
an impairment loss should be recognized equal to the difference between the investments cost and
its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and we began
presenting the new disclosure requirements in our consolidated financial statements for the year
ended December 31, 2003. The recognition and measurement provisions were initially effective for
other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004;
however, in September 2004, the effective date of these provisions was delayed until the
finalization of a FASB Staff Position to provide additional implementation guidance. In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, which addresses accounting for differences between the contractual cash flows of certain
loans and debt securities and the cash flows expected to be collected when loans or debt securities
are acquired in a transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated loans. The application
of SOP 03-3 limits the interest income, including accretion of purchase price discounts that may be
recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess
of contractual cash flows over cash 18




---



##### Table of Contents



flows expected to be collected to be recognized as an adjustment of yield, loss accrual or
valuation allowance, such as the allowance for possible loan losses. SOP 03-3 requires that
increases in expected cash flows subsequent to the initial investment be recognized prospectively
through adjustment of the yield on the loan or debt security over its remaining life. Decreases in
expected cash flows should be recognized as impairment. In the case of loans acquired in a business
combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant
change from current purchase accounting practice whereby the acquirees allowance for loan losses
is typically added to the acquirers allowance for loan losses. SOP 03-3 is effective for loans and
debt securities acquired by us beginning January 1, 2005. The adoption of this new standard is not
expected to have a material impact on our financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions for FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 were adopted for all annual
periods ending after December 15, 2002. Our implementation of the provisions of FIN 45 did not
have a material impact on our financial statements. In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. FIN 46 establishes the criteria used to identify variable interest entities and
to determine whether or not to consolidate a variable interest entity. We adopted FIN 46 at
December 31, 2003. In accordance therewith, we deconsolidated our trust subsidiaries. The result
was to recognize investments in the trusts in other assets, and to report the amount of
subordinated debentures issued by us to the trusts in the liability section of our consolidated
balance sheet. In addition, beginning January 1, 2004, we recognized the interest expense on the
subordinated debentures in the consolidated statements of income. Prior to FIN 46, we consolidated
our trust subsidiaries and reported trust preferred securities in the mezzanine section of our
consolidated balance sheets and recognized the proportionate share of income attributable to the
preferred shareholders as minority interest in income of subsidiary in the consolidated statements
of income. The adoption of FIN 46, as revised, did not have a material impact on the results of
operations or financial position, but did affect net interest income, our efficiency ratio and our
net interest spread. As a result of the adoption of FIN 46 at December 31, 2003, financial
information prior to the adoption has not been restated. General The following discussion and analysis reviews the financial condition and results of our
consolidated operations, including our consolidated subsidiaries: Imperial Capital Bank and
Imperial Capital Real Estate Investment Trust. The following discussion and analysis is intended to identify the major factors that
influenced our financial condition as of December 31, 2004 and 2003 and our results of operations
for the years ended December 31, 2004, 2003 and 2002. Our primary business involves the acceptance
of customer deposits and the origination and purchase of loans secured by income producing real
estate, located predominately in California and, to a lesser extent, the origination of franchise
and film finance loans. Consolidated net income in 2004 was $30.6 million, or $4.75 per diluted share, compared to
$29.6 million, or $4.55 per diluted share in 2003 and $20.0 million, or $3.16 per diluted share in
2002. We
expect that, as a result of the termination of the RAL program, income will be materially less in
2005 as compared to 2004 and 2003. The increase in net income in 2004 was primarily due to an increase in interest income earned
to $125.0 million for 2004 as compared to $116.0 million in 2003, and a decline in provision for
loan losses to $4.7 million for 2004 as compared to $7.8 million in 2003. These changes were
partially offset by a $5.4 million increase in interest expense incurred on deposits and FHLB
advances and other borrowings, as well as a $4.8 million increase in non-interest expense. Non-interest expense increased due to our investment in the
national expansion of our small balance multi-family
lending platform, which should increase our loan production capabilities. The increase in net income in 2003 as compared to 2002, was primarily due to an increase in
net interest income to $85.1 million for 2003 as compared to $73.3 million in 2002, and an increase
in non-interest income to $15.2 million for 2003 as compared to $373,000 for 2002. These increases
were partially offset by a $9.6 million increase in non-interest expense, a $2.6 million increase
in minority interest in income of subsidiary, and a $6.2 million increase in provision for income
taxes. 19




---



##### Table of Contents



Total loan production including the unfunded portion of loans was $1.02 billion for the year
ended December 31, 2004, as compared to $794.8 million and $666.9 million, respectively, for the
years ended December 31, 2003 and 2002. Loan production in 2004 consisted of the origination and
purchase of $634.8 million of commercial real estate loans, $238.0 million of small balance
multi-family real estate loans, $92.2 million of film finance loans, and $52.1 million of franchise
loans. Our average total assets increased approximately 20.5% during 2004 to $2.1 billion. Average
cash and investment securities totaled $419.5 million in 2004 compared to $277.8 million in 2003,
an increase of $141.6 million, or 51.0%. Average loans receivable totaled $1.6 billion in 2004
compared to $1.4 billion in 2003, an increase of $190.3 million, or 13.4%. Average interest bearing
deposit accounts totaled $1.2 billion in 2004 compared to $1.0 billion in 2003, an increase of
$216.2 million, or 21.4%. FHLB advances and other borrowings averaged $273.9 million in 2004,
compared to $201.4 million in 2003, an increase of $72.5 million, or 36.0%. The average balance of
the CMOs was $3.9 million during 2004 compared to $44.7 million in 2003 reflecting repayments of
Imperial Capital REIT loans. The allowance for loan losses as a percentage of our total loans was 1.9 percent at December
31, 2004, as compared to 2.2 percent at December 31, 2003. During the year ended December 31,
2004, we had net charge-offs of $2.6 million, compared to $7.4 million during the same period last
year. At December 31, 2004, shareholders equity totaled $194.7 million or 8.4 percent of total
assets. During 2004, we continued our stock repurchase program with
the implementation of
our eighth and ninth extensions of the stock repurchase program. For the year ended December 31, 2004, we repurchased 678,601 shares at an
average price of $44.72 per share. Since beginning share repurchases in April 1997, a total of
2,869,502 shares were repurchased returning approximately $67.2 million of capital to our
shareholders at an average price of $23.43 per share. Through our stock repurchase program,
approximately 97.0 percent of our contributed capital has been returned to shareholders. ITLA
Capitals book value per share of common stock was $35.09 as of December 31, 2004, an increase of
12.1 percent from $31.30 per share as of December 31, 2003.
On March 9, 2005, we announced the tenth extension of the stock repurchase program
for up to five percent of ITLA Capitals outstanding shares of common stock. Results of Operations Net Interest Income The following table presents, for the periods indicated, our condensed average balance sheet
information, together with interest income and yields earned on average interest-earning assets and
interest expense and rates paid on average interest-bearing liabilities. Average balances are
computed using daily average balances. Nonaccrual loans are included in loans receivable. Years Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(dollars in thousands)AssetsCash and investment securities
    
    $
    419,452
    
    
    $
    9,291
    
    
    
    2.22
    %
    
    $
    277,832
    
    
    $
    5,399
    
    
    
    1.94
    %
    
    $
    77,384
    
    
    $
    3,475
    
    
    
    4.49
    %Real estate loans (1)
    
    
    1,318,607
    
    
    
    93,955
    
    
    
    7.13
    %
    
    
    1,145,177
    
    
    
    89,327
    
    
    
    7.80
    %
    
    
    1,083,645
    
    
    
    91,066
    
    
    
    8.40
    %Real estate loans held at REIT (1)(4)
    
    
    49,777
    
    
    
    2,505
    
    
    
    5.03
    %
    
    
    97,698
    
    
    
    5,980
    
    
    
    6.12
    %
    
    
    143,705
    
    
    
    10,239
    
    
    
    7.13
    %Franchise loans (1)
    
    
    125,280
    
    
    
    8,608
    
    
    
    6.87
    %
    
    
    66,101
    
    
    
    4,772
    
    
    
    7.22
    %
    
    
    60,492
    
    
    
    4,479
    
    
    
    7.40
    %Entertainment finance loans (1)
    
    
    96,227
    
    
    
    7,040
    
    
    
    7.32
    %
    
    
    99,104
    
    
    
    7,433
    
    
    
    7.50
    %
    
    
    18,060
    
    
    
    1,349
    
    
    
    7.47
    %Commercial and other loans (1)
    
    
    16,234
    
    
    
    3,555
    
    
    
    21.90
    %
    
    
    7,732
    
    
    
    3,066
    
    
    
    39.65
    %
    
    
    
    
    
    
    
    
    
    
    Total loans receivable
    
    
    1,606,125
    
    
    
    115,663
    
    
    
    7.20
    %
    
    
    1,415,812
    
    
    
    110,578
    
    
    
    7.81
    %
    
    
    1,305,902
    
    
    
    107,133
    
    
    
    8.20
    %Total interest earning assets
    
    
    2,025,577
    
    
    $
    124,954
    
    
    
    6.17
    %
    
    
    1,693,644
    
    
    $
    115,977
    
    
    
    6.85
    %
    
    
    1,383,286
    
    
    $
    110,608
    
    
    
    8.00
    %Non-interest earning assets
    
    
    94,739
    
    
    
    
    
    
    
    
    
    
    
    70,226
    
    
    
    
    
    
    
    
    
    
    
    70,468Allowance for loan losses
    
    
    (35,214
    )
    
    
    
    
    
    
    
    
    
    
    (33,508
    )
    
    
    
    
    
    
    
    
    
    
    (30,071
    )Total assets
    
    $
    2,085,102
    
    
    
    
    
    
    
    
    
    
    $
    1,730,362
    
    
    
    
    
    
    
    
    
    
    $
    1,423,683Liabilities and Shareholders EquityInterest bearing deposit accounts:Interest bearing demand accounts
    
    $
    80,052
    
    
    $
    1,409
    
    
    
    1.76
    %
    
    $
    12,571
    
    
    $
    136
    
    
    
    1.08
    %
    
    $
    
    
    
    $
    
    
    
    
    Money market and passbook accounts
    
    
    140,637
    
    
    
    2,680
    
    
    
    1.91
    %
    
    
    162,638
    
    
    
    2,551
    
    
    
    1.57
    %
    
    
    151,258
    
    
    
    2,873
    
    
    
    1.90
    %Time certificates
    
    
    1,003,555
    
    
    
    23,827
    
    
    
    2.37
    %
    
    
    832,873
    
    
    
    21,929
    
    
    
    2.63
    %
    
    
    780,168
    
    
    
    26,476
    
    
    
    3.39
    %Total interest bearing deposit accounts
    
    
    1,224,244
    
    
    
    27,916
    
    
    
    2.28
    %
    
    
    1,008,082
    
    
    
    24,616
    
    
    
    2.44
    %
    
    
    931,426
    
    
    
    29,349
    
    
    
    3.15
    %Collateralized mortgage obligations
    
    
    3,926
    
    
    
    71
    
    
    
    1.81
    %
    
    
    44,767
    
    
    
    1,076
    
    
    
    2.40
    %
    
    
    88,485
    
    
    
    2,301
    
    
    
    2.60
    %FHLB advances and other borrowings
    
    
    273,902
    
    
    
    7,272
    
    
    
    2.65
    %
    
    
    201,419
    
    
    
    5,175
    
    
    
    2.57
    %
    
    
    194,160
    
    
    
    5,672
    
    
    
    2.92
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    6,159
    
    
    
    7.11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest bearing liabilities
    
    
    1,588,672
    
    
    $
    41,418
    
    
    
    2.61
    %
    
    
    1,254,268
    
    
    $
    30,867
    
    
    
    2.46
    %
    
    
    1,214,071
    
    
    $
    37,322
    
    
    
    3.07
    %Non-interest bearing demand accounts
    
    
    8,023
    
    
    
    
    
    
    
    
    
    
    
    2,973
    
    
    
    
    
    
    
    
    
    
    
    Other non-interest bearing liabilities
    
    
    290,077
    
    
    
    
    
    
    
    
    
    
    
    297,549
    
    
    
    
    
    
    
    
    
    
    
    62,080Shareholders equity
    
    
    198,330
    
    
    
    
    
    
    
    
    
    
    
    175,572
    
    
    
    
    
    
    
    
    
    
    
    147,532Total liabilities and shareholders equity
    
    $
    2,085,102
    
    
    
    
    
    
    
    
    
    
    $
    1,730,362
    
    
    
    
    
    
    
    
    
    
    $
    1,423,683Net interest spread (2)
    
    
    
    
    
    
    
    
    
    
    3.56
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %
    
    
    
    
    
    
    
    
    
    
    4.93
    %Net interest income before provisions for loan losses
    
    
    
    
    
    $
    83,536
    
    
    
    
    
    
    
    
    
    
    $
    85,110
    
    
    
    
    
    
    
    
    
    
    $
    73,286Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    
    
    
    5.03
    %
    
    
    
    
    
    
    
    
    
    
    5.30
    %
 20




---



##### Table of Contents



(1)
    
    Before allowance for loan losses and net of deferred loan fees and costs. Net loan fee
accretion of $1.8 million, $2.4 million and $1.7 million was included in net interest income
for 2004, 2003 and 2002, respectively.(2)
    
    Average yield on interest-earning assets minus average rate paid on interest-bearing
liabilities.(3)
    
    Net interest income divided by total average interest-earning assets.(4)
    
    During 2004, these loans were transferred from the ICCMAC Trust to Imperial Capital REIT.
See Item 1. Business- Imperial Capital Real Estate Investment Trust. Our primary source of revenue is net interest income. Our net interest income is affected by
(a) the difference between the yields recognized on interest earning assets, including loans and
investments, and the interest rates paid on interest bearing liabilities, including deposits and
borrowings, which is referred to as net interest spread, and (b) the relative amounts of interest
earning assets and interest bearing liabilities. As of December 31, 2004, 2003 and 2002, our ratio
of average interest earning assets to average interest bearing liabilities was 127.50%, 135.03% and
113.94%, respectively. The following table sets forth a summary of the changes in interest income and interest
expense resulting from changes in average interest earning asset and interest bearing liability
balances and changes in average interest rates. The change in interest due to both volume and rate
has been allocated to change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of each. 2004 vs. 2003
    
    
    2003 vs. 2002Increase (Decrease)
    
    
    Increase (Decrease)Due to:
    
    
    Due to:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(in thousands)Interest and fees earned on:Loans, net
    
    $
    16,573
    
    
    $
    (11,488
    )
    
    $
    5,085
    
    
    $
    9,563
    
    
    $
    (6,118
    )
    
    $
    3,445Cash and investment securities
    
    
    3,793
    
    
    
    99
    
    
    
    3,892
    
    
    
    3,894
    
    
    
    (1,970
    )
    
    
    1,924Total increase (decrease) in interest income
    
    
    20,366
    
    
    
    (11,389
    )
    
    
    8,977
    
    
    
    13,457
    
    
    
    (8,088
    )
    
    
    5,369Interest paid on:Deposit accounts
    
    
    5,748
    
    
    
    (2,448
    )
    
    
    3,300
    
    
    
    1,944
    
    
    
    (6,677
    )
    
    
    (4,733
    )Collateralized mortgage obligations
    
    
    (859
    )
    
    
    (146
    )
    
    
    (1,005
    )
    
    
    (1,048
    )
    
    
    (177
    )
    
    
    (1,225
    )FHLB advances and other borrowing
    
    
    1,970
    
    
    
    127
    
    
    
    2,097
    
    
    
    186
    
    
    
    (683
    )
    
    
    (497
    )Junior subordinated debentures
    
    
    6,159
    
    
    
    
    
    
    
    6,159
    
    
    
    
    
    
    
    
    
    
    
    Total increase (decrease) in interest expense
    
    
    13,018
    
    
    
    (2,467
    )
    
    
    10,551
    
    
    
    1,082
    
    
    
    (7,537
    )
    
    
    (6,455
    )Increase (decrease) net interest income
    
    $
    7,348
    
    
    $
    (8,922
    )
    
    $
    (1,574
    )
    
    $
    12,375
    
    
    $
    (551
    )
    
    $
    11,824
 2004 Compared to 2003 Net interest income before provision for loan losses decreased to $83.5 million for the year
ended December 31, 2004, compared to $85.1 million for the prior year, a decrease of 1.8%. The
decrease was primarily caused by the effect of interest expense from our trust preferred securities
as a result of the adoption of FIN 46 at December 31, 2003. The adoption of FIN 46 required that, beginning on
January 1, 2004, we record the expense incurred on our junior subordinated debentures related to
the trust preferred securities as interest expense in the consolidated statements of income. Prior
period financial information has not been restated for the adoption of FIN 46, and as a result,
amounts recorded relating to interest payments to the trusts were recorded as minority interest in
income of subsidiary for all periods prior to January 1, 2004. Excluding the effect of the
adoption of FIN 46, net interest income before provision for loan losses increased by $4.6 million,
or 5.4 percent, as compared to 2003. This increase was primarily a result of an increase in the
average balance of loans outstanding, reflecting an increase in loan production and a decline in
loan prepayment speeds experienced during the year, an increase in the average balance of
investments held-to-maturity, partially offset by a general decline in our net interest spread and
an increase in the average balance of interest bearing liabilities. The decline in net interest
spread primarily resulted from a decline in the yield of our loan portfolio as higher yielding
loans were repaid and replaced by new loan production at lower current market interest rates and
the addition of new borrowings at higher current market interest rates. The average yield on our total loan portfolio was 7.20% in 2004 compared to 7.81% in 2003.
The average yield on our real estate loan portfolio was 7.18% in 2004 and 7.80% in 2003. Our commercial real estate loan portfolio is primarily composed of adjustable rate mortgages
indexed to six month LIBOR with interest rate floors, below which the loans contractual interest
rate may not adjust. Approximately 83.2% of our real estate loan portfolio was comprised of
adjustable rate loans at December 31, 2004, and approximately
14.5% of the real estate loan
portfolio was comprised of loans, which become adjustable rate loans after an initial fixed
rate period of three or five years. Our adjustable rate loans generally re-price on a
quarterly or semi-annual basis with increases generally limited to maximum adjustments of 2% per
year up to 5% for the life of the loan. As of December 31, 2004, approximately $1.6 billion or
87.3% of our real estate loan portfolio contained interest rate floors, 21




---



##### Table of Contents



below which the loans contractual interest rate may not adjust. The inability of our
real estate loans to adjust downward can contribute to increased income in periods of declining
interest rates, and also assists us in our efforts to limit the risks to earnings resulting
from changes in interest rates, subject to the risk that borrowers may refinance these loans during
periods of declining interest rates. At December 31, 2004, the weighted average floor interest
rate of our real estate loan portfolio was 6.32%. At that date, approximately $784.5 million or 49.2% of our real estate loan portfolio
was at the floor interest rate. At December 31, 2004, 76.7% of the adjustable rate loans
outstanding in our real estate loan portfolio had a lifetime interest rate cap. The weighted-average lifetime interest rate cap on
this portfolio was 11.25%. Interest expense on interest bearing liabilities increased $10.6 million, or 34.2%, to $41.4
million in 2004 compared to $30.9 million in 2003. The increase was primarily due to an increase of
$6.2 million in interest expense caused by the adoption of FIN 46, discussed above, as well as an
increase in interest expense on deposits and FHLB advances and other borrowings. Interest expense
from deposit accounts increased $3.3 million, or 13.4%, to $27.9 million in 2004 compared to $24.6
million in 2003 due to the growth in interest bearing deposits during 2004 partially offset by a
decline in the average rate paid on deposits as a result of lower current market interest rates as
compared to the prior year. The average rate paid on deposits was 2.28% in 2004 compared to 2.44%
in 2003. Interest expense from the CMOs decreased $1.0 million, or 93.4%, to $71,000 in 2004 as
compared to $1.1 million in 2003. The decrease was primarily due to a decline in average balance of
CMOs, as a result of the loan prepayment speeds experienced in 2004 related to the loans securing
the CMOs. The average balance and average yield on the CMOs was $3.9 million and 1.81%,
respectively, in 2004 as compared to $44.8 million and 2.40%, respectively, in 2003. Interest expense from FHLB advances and other borrowings increased $2.1 million to $7.3
million in 2004 compared to $5.2 million in 2003, due to an increase in the average balance and
average rate paid on FHLB advances and other borrowings. The average balance of FHLB advances and
other borrowings increased $72.5 million, or 36.0%, to $273.9 million in 2004 compared to $201.4
million in 2003. The average rate paid on FHLB advances and other borrowings was 2.65% in 2004
compared to 2.57% in 2003. We have used our borrowing capacity under our FHLB credit line, as well
as our other borrowing facilities to fund loan production and the purchase of investments
held-to-maturity. Provision for Loan Losses Provision for loan losses decreased to $4.7 million in 2004 compared to $7.8 million in 2003.
The current period provision for loan losses was recorded to provide reserves adequate to support
the known and inherent risk of loss in the loan portfolio, and for specific reserves required at
December 31, 2004. The decline in the provision for loan losses in 2004 as compared to 2003
reflects the overall geographic diversification of our real estate loan portfolio and the increase
in our small balance multi-family loan portfolio caused by the national expansion of this lending
platform. See also Credit Risk Elements  Allowance for Loan Losses and Nonperforming Assets. Non-interest Income Non-interest income decreased $732,000 to $14.5 million in 2004 compared to $15.2 million in
2003. During 2004 and 2003, non-interest income primarily consisted of fee income earned in
connection with the Banks RAL program with Household. During 2004, the Bank earned $9.3 million
of net premiums on the sale of RAL loans and $4.6 million of processing and administrative fees.
RAL income earned during 2003 was $9.0 million of net premiums on the sale of RAL loans and $4.6
million of processing and administrative fees, respectively. Because the RAL program related to
the filing of income tax returns, transaction activity was concentrated during the tax season. This
resulted in our earning substantially all of our RAL program income in the first quarters of 2004
and 2003. As a result of the termination of the RAL program, we expect non-interest income to be
materially less in 2005. Non-interest Expense General and Administrative Expense General and administrative expenses increased to $42.0 million during 2004, compared to $36.7
million in 2003. The increase was attributable to the development and continued national expansion
of the small balance multi-family real estate lending platform. During the current year, we opened
twenty loan production offices, and to date, there are twenty-six loan production offices serving
the Western United States, the Southeast region, the Mid-Atlantic region, the Ohio Valley, the
Metro New York area and New England. Our efficiency ratio was 43.6 percent for the year ended
December 31, 2004, compared to 37.8 percent for 2003, reflecting the national expansion of our
small balance multi-family lending platform. Full time equivalent associates averaged 236 in 2004
compared to 209 in 2003. 22




---



##### Table of Contents



Real Estate Owned Expense Real estate owned expense decreased to $712,000 in 2004 compared to $1.2 million in 2003. The
decrease was primarily attributable to a $255,000 decrease in real estate owned expenses, caused by
the decline in the average balance of other real estate owned (OREO) maintained during the year
and an increase in gain on sale of OREO, net of $375,000, partially offset by an increase of
$130,000 in the provision for losses on OREO. See also Credit Risk Elements  Allowance for Loan
Losses and Nonperforming Assets. Income Taxes Provision for income taxes increased to $19.9 million in 2004 compared to $18.9 million in
2003. The increase in provision for income taxes was due to the increase in taxable income earned
in 2004. The effective tax rate was 39.44% and 39.00%, respectively, for 2004 and 2003. The
effective tax rate differed from the applicable statutory federal tax rate due to state income
taxes and the state income tax deduction for tax exempt income on loans located in designated
redevelopment and enterprise zones and due to federal income tax credits received from a low income
housing tax credit investment. At December 31, 2004, we had a net deferred tax asset of $10.5 million. The deferred tax
asset related primarily to loan loss provisions recognized on our financial statements that have
not yet been recognized on our income tax returns. During 2004, we had no deferred tax assets
relating to net operating loss carry forward deductions. The deferred tax asset was considered
fully realizable. Accordingly, no valuation allowance on the deferred tax asset was established in
2004. Minority Interest in Income of Subsidiary Minority interest in income of subsidiary, consisting of accrued distributions payable on our
trust preferred securities, was none in 2004 and $6.1 million in 2003. As discussed above, the
adoption of FIN 46 required that, beginning January 1, 2004, we record the expense incurred on our
junior subordinated debentures as interest expense on the consolidated statement of income. During
2004, we recorded $6.2 million of interest expense related to our junior subordinated debentures.
See Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial
Statements  Note 9. 2003 Compared to 2002 Net interest income before provision for loan losses increased to $85.1 million for the year
ended December 31, 2003, compared to $73.3 million for the year ended December 31, 2002, an
increase of 16.1%. This increase was due primarily to increased net interest income of the Bank
offset by the decline in the net interest income of Imperial Capital REIT. The Banks net interest
income improved primarily as a result of the increase in the average balance of loans outstanding
and a decline in the average cost of funds due to its interest bearing liabilities repricing to
lower market interest rates. The increase in the Banks net interest income was partially offset
by a decline in the yield of its loan portfolio as higher yielding loans were repaid and replaced
by new loan production at lower market interest rates. The net interest income of Imperial Capital
REIT declined in 2003 as compared to 2002 primarily as a result of the reduction in the average
balance of its loan portfolio, caused by a significant increase in loan prepayments, and a decline
in its net interest spread due to its assets repricing to lower market interest rates slightly
faster than its liabilities. The average yield on our total loan portfolio was 7.81% in 2003 compared to 8.20% in 2002.
Our commercial real estate loan portfolio is primarily composed of adjustable rate mortgages
indexed to six month LIBOR with interest rate floors, below which the loans contractual interest
rate may not adjust. Approximately 95.4% of our real estate loan portfolio (including real estate
loans held in trust) was comprised of adjustable rate mortgages at December 31, 2003. These
adjustable rate mortgages generally re-price on a quarterly basis and, as of December 31, 2003,
approximately $1.3 billion or 96.5% of our real estate loan portfolio contained interest rate
floors, below which the loans contractual interest rate may not adjust. At December 31, 2003, the
weighted average floor interest rate of our real estate loan portfolio was 6.83%. At that date, approximately $1.2
billion or 93.6% of our real estate loan portfolio was at the floor interest rate. Net interest income was also positively impacted by an increased interest income from cash and
investment securities as a result of increased liquidity in connection with the Banks RAL program
with Household. Interest expense on interest bearing liabilities decreased $6.5 million, or 17.3%, to $30.9
million in 2003 compared to $37.3 million in 2002 primarily due to a decrease in interest expense
on deposits and CMOs. Interest expense from deposit accounts decreased $4.7 million, or 16.1%, to
$24.6 million in 2003 compared to $29.3 million in 2002 due to decreases in the average rate paid
on deposits as a result of lower market interest rates and the growth in retail non-interest
bearing demand deposits in 2003. The average rate paid on deposits was 2.44% in 2003 compared to
3.15% in 2002. 23




---



##### Table of Contents



Interest expense from the CMOs decreased $1.2 million or 53.2% to $1.1 million in 2003 as
compared to $2.3 million in 2002. The decrease was primarily due to a decrease in rates paid on
CMOs, as well as a decline in average balance of CMOs. The average balance and average yield on
the CMOs was $44.8 million and 2.40%, respectively, in 2003 as compared to $88.5 million and 2.60%
in 2002, respectively. Interest expense from FHLB advances decreased $497,000 to $5.2 million in 2003 compared to
$5.7 million in 2002, due to a decrease in the average rate paid on FHLB advances. The average
balance of FHLB advances increased $7.3 million or 3.7% to $201.4 million in 2003 compared to
$194.2 million in 2002. The average rate paid on FHLB advances was 2.57% in 2003 compared to 2.92%
in 2002. Provision for Loan losses Provision for loan losses decreased to $7.8 million in 2003 compared to $9.0 million in 2002.
The provision for loan losses in 2003 was recorded to provide reserves adequate to support the
known and inherent risk of loss in the loan portfolio, and for specific reserves. See also Credit
Risk Elements  Allowance for Loan Losses and Nonperforming Assets. Non-interest Income Non-interest income increased $14.9 million to $15.2 million in 2003 compared to $0.4 million
in 2002. The increase in non-interest income was due primarily to fee income earned in connection
with the RAL program, consisting of approximately $9.0 million of net premiums on the sale of RAL
loans and $4.6 million of processing and administrative fees. Because the RAL program related to
the filing of income tax returns, transaction activity was concentrated during the tax season. This
resulted in our earning substantially all of our RAL program income in the first quarter of 2003. Non-interest Expense General and Administrative Expense General and administrative expenses increased to $36.7 million for the year ended December 31,
2003, compared to $27.0 million for the year ended December 31, 2002. The increase was attributable
to the acquisition of the Banks film finance division, the development of our small balance multi-family real estate
lending platform, additions to our franchise loan origination staff, and certain
infrastructure and personnel costs relating to the Banks charter conversion. Our efficiency ratio
was 37.8 percent for the year ended December 31, 2003, compared to 38.5 percent for the year ended
December 31, 2002. Full time equivalent associates averaged 209 in 2003 compared to 154 in 2002. Real Estate Owned Expense Real estate owned expense decreased to $1.2 million in 2003 compared to $1.3 million in 2002.
The decrease was primarily attributable to a $250,000 decrease in real estate owned expenses,
partially offset by an increase of $74,000 in the provision for losses on OREO and a decrease of
$65,000 in gain on sale of OREO, net. See also Credit Risk Elements  Allowance for Loan Losses
and Nonperforming Assets. Income Taxes Provision for income taxes increased to $18.9 million in 2003 compared to $12.8 million in
2002. The increase in provision for income taxes was due to the increase in taxable income earned
in 2003. The effective tax rate was 39.0% for 2003 and 2002. The effective tax rate differed from
the applicable statutory federal tax rate due to state income taxes and the state income tax
deduction for tax exempt income on loans located in designated redevelopment and enterprise zones
and due to federal income tax credits received from a low income housing tax credit investment. At December 31, 2003, we had a net deferred tax asset of $11.6 million. The deferred tax
asset related primarily to loan loss provisions recognized on our financial statements that have
not yet been recognized on our income tax returns. During 2003, we had no deferred tax assets
relating to net operating loss carry forward deductions. The deferred tax asset was considered
fully realizable. Accordingly, no valuation allowance on the deferred tax asset was established in
2003. 24




---



##### Table of Contents



Minority Interest in Income of Subsidiary Minority interest in income of subsidiary, consisting of accrued distributions payable on our
trust preferred securities, was $6.1 million in 2003 as compared to $3.5 million in 2002. The
increase was due to the issuance of $55.0 million of variable rate cumulative trust preferred
securities during the fourth quarter of 2002, which were outstanding for the entire year in 2003.
See Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial
Statements  Note 9. Financial Condition At December 31, 2004 Compared with December 31, 2003 Total assets increased by $500.0 million, or 27.5%, to $2.3 billion at December 31, 2004
compared to $1.8 billion at December 31, 2003. The increase in total assets was due primarily to a
$288.4 million, or 19.2%, increase in our net loan portfolio to $1.8 billion at December 31, 2004
from $1.5 billion at December 31, 2003, and a $296.0 million increase in investments
held-to-maturity. This increase was partially offset by a $90.7 million, or 50.9%, decrease in
cash and cash equivalents. The increase in the loan portfolio was primarily due to the increased
loan production and a decline in loan prepayment speeds experienced during 2004 as compared to
2003. The growth in assets was primarily funded by the increase in deposits of $285.0 million and
an increase in FHLB advances and other borrowings of $222.1 million, partially offset by a decrease
in CMOs outstanding of $15.9 million. The increase in shareholders equity was primarily due to
the retention of net income, partially offset by the increase in treasury stock purchases of $30.3
million. At December 31, 2003 Compared with December 31, 2002 Total assets increased by $96.3 million, or 5.6%, to $1.8 billion at December 31, 2003
compared to $1.7 billion at December 31, 2002. This increase was primarily due to a $17.5 million,
or 10.9%, increase in cash and cash equivalents to $178.3 million at December 31, 2003 from $160.8
million at December 31, 2002, and a $67.2 million, or 4.7%, increase in loans receivable, net to
$1.5 billion at December 31, 2003 from $1.4 billion at December 31, 2002. The growth in assets was
funded primarily by an increase in deposits of $81.1 million and in FHLB advances of $23.5 million.
The increase in deposits was primarily related to an increase in interest bearing demand accounts
of $38.5 million and an increase in time certificates of deposit of $45.5 million. CMOs decreased
from $69.1 million at December 31, 2002 to $15.9 million at December 31, 2003, reflecting
repayments on loans held by Imperial Capital REIT. Shareholders equity increased primarily due to
the retention of $29.6 million of net income. Loans Receivable, Net The following table shows the comparison of our loan portfolio by major categories as of the
dates indicated. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)Real estate loans
    
    $
    1,387,973
    
    
    $
    1,196,729
    
    
    $
    1,189,258
    
    
    $
    1,191,688
    
    
    $
    1,176,988Construction loans
    
    
    183,207
    
    
    
    129,540
    
    
    
    101,422
    
    
    
    54,129
    
    
    
    95,206Total real estate loans
    
    
    1,571,180
    
    
    
    1,326,269
    
    
    
    1,290,680
    
    
    
    1,245,817
    
    
    
    1,272,194Film finance
    
    
    99,729
    
    
    
    98,630
    
    
    
    119,283
    
    
    
    
    
    
    
    Franchise loans
    
    
    137,477
    
    
    
    102,128
    
    
    
    54,672
    
    
    
    57,617
    
    
    
    3,912Commercial and other loans
    
    
    11,931
    
    
    
    6,869
    
    
    
    4,314
    
    
    
    
    
    
    
    1,820,317
    
    
    
    1,533,896
    
    
    
    1,468,949
    
    
    
    1,303,434
    
    
    
    1,276,106Unamortized premium
    
    
    6,346
    
    
    
    5,429
    
    
    
    7,898
    
    
    
    9,773
    
    
    
    11,300Deferred loan origination (fees) and costs
    
    
    2,635
    
    
    
    (500
    )
    
    
    (5,604
    )
    
    
    (2,029
    )
    
    
    (2,571
    )1,829,298
    
    
    
    1,538,825
    
    
    
    1,471,243
    
    
    
    1,311,178
    
    
    
    1,284,835Allowance for loan losses
    
    
    (35,483
    )
    
    
    (33,401
    )
    
    
    (33,009
    )
    
    
    (26,650
    )
    
    
    (27,186
    )$
    1,793,815
    
    
    $
    1,505,424
    
    
    $
    1,438,234
    
    
    $
    1,284,528
    
    
    $
    1,257,649
 25




---



##### Table of Contents



The contractual maturities of our loan portfolio at December 31, 2004 are as follows: Loans Maturing inBetween
    
    
    GreaterLess Than
    
    
    One and
    
    
    Than FiveOne Year
    
    
    Five Years
    
    
    Years
    
    
    Total(dollars in thousands)Real estate loans
    
    $
    18,182
    
    
    $
    160,624
    
    
    $
    1,209,167
    
    
    $
    1,387,973Construction loans
    
    
    69,995
    
    
    
    71,189
    
    
    
    42,023
    
    
    
    183,207Film finance
    
    
    80,840
    
    
    
    18,889
    
    
    
    
    
    
    
    99,729Franchise loans
    
    
    
    
    
    
    5,914
    
    
    
    131,563
    
    
    
    137,477Commercial and other loans
    
    
    10,369
    
    
    
    1,465
    
    
    
    97
    
    
    
    11,931$
    179,386
    
    
    $
    258,081
    
    
    $
    1,382,850
    
    
    $
    1,820,317Loans with fixed interest rates
    
    $
    521
    
    
    $
    36,412
    
    
    $
    3,359
    
    
    $
    40,292Loans with variable interest rates
    
    
    178,865
    
    
    
    221,669
    
    
    
    1,379,491
    
    
    
    1,780,025$
    179,386
    
    
    $
    258,081
    
    
    $
    1,382,850
    
    
    $
    1,820,317Percentage with variable interest rates
    
    
    99.7
    %
    
    
    85.9
    %
    
    
    99.8
    %
    
    
    97.8
    %
 The table above should not be regarded as a forecast of future cash collections because a
substantial portion of real estate loans may be renewed or repaid prior to contractual maturity and
have adjustable interest rates. The following table sets forth certain information regarding the real property collateral
securing our real estate loan portfolio as of December 31, 2004. Number
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-of
    
    
    Gross
    
    
    of
    
    
    Range of Principal Balance
    
    
    AccrualLoans
    
    
    Amount
    
    
    Total
    
    
    Min
    
    
    Max
    
    
    Average
    
    
    Loans(dollars in thousands)Income Producing Property Loans:Multi-family (5 or more units)
    
    
    1,299
    
    
    $
    811,849
    
    
    
    51.67
    %
    
    $
    1
    
    
    $
    7,188
    
    
    $
    625
    
    
    $
    838Retail
    
    
    97
    
    
    
    114,037
    
    
    
    7.26
    %
    
    
    1
    
    
    
    10,282
    
    
    
    1,176
    
    
    
    4,659Office
    
    
    79
    
    
    
    128,023
    
    
    
    8.15
    %
    
    
    13
    
    
    
    15,945
    
    
    
    1,621
    
    
    
    Hotel
    
    
    26
    
    
    
    72,065
    
    
    
    4.59
    %
    
    
    81
    
    
    
    11,336
    
    
    
    2,772
    
    
    
    1,377Industrial/warehouse
    
    
    36
    
    
    
    30,907
    
    
    
    1.97
    %
    
    
    7
    
    
    
    3,994
    
    
    
    859
    
    
    
    Mixed-use
    
    
    67
    
    
    
    60,506
    
    
    
    3.85
    %
    
    
    13
    
    
    
    8,000
    
    
    
    903
    
    
    
    103Mobile home parks
    
    
    60
    
    
    
    45,711
    
    
    
    2.91
    %
    
    
    176
    
    
    
    2,246
    
    
    
    762
    
    
    
    Assisted living
    
    
    10
    
    
    
    41,042
    
    
    
    2.61
    %
    
    
    316
    
    
    
    8,532
    
    
    
    4,104
    
    
    
    Storage
    
    
    11
    
    
    
    37,047
    
    
    
    2.36
    %
    
    
    611
    
    
    
    5,881
    
    
    
    3,368
    
    
    
    Other
    
    
    69
    
    
    
    41,535
    
    
    
    2.64
    %
    
    
    7
    
    
    
    3,796
    
    
    
    602
    
    
    
    Total income producing
    
    
    1,754
    
    
    
    1,382,722
    
    
    
    88.01
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,977Construction and Land:Construction
    
    
    49
    
    
    
    183,207
    
    
    
    11.66
    %
    
    
    93
    
    
    
    16,609
    
    
    
    3,739
    
    
    
    Land
    
    
    2
    
    
    
    1,931
    
    
    
    0.12
    %
    
    
    375
    
    
    
    1,556
    
    
    
    966
    
    
    
    Total construction and land.
    
    
    51
    
    
    
    185,138
    
    
    
    11.78
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Single-family mortgages:Single-family (1-4 units)
    
    
    8
    
    
    
    3,320
    
    
    
    0.21
    %
    
    
    5
    
    
    
    2,720
    
    
    
    415
    
    
    
    801,813
    
    
    $
    1,571,180
    
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,057
 26




---



##### Table of Contents



The following table sets forth the location of the collateral for our real estate loan
portfolios as of December 31, 2004. Number
    
    
    
    
    
    
    Percentof
    
    
    Gross
    
    
    ofLoans
    
    
    Amount
    
    
    Total(dollars in thousands)Southern California:Los Angeles County
    
    
    655
    
    
    $
    414,732
    
    
    
    26.40
    %San Diego County
    
    
    58
    
    
    
    69,469
    
    
    
    4.42
    %Riverside County
    
    
    49
    
    
    
    68,304
    
    
    
    4.35
    %San Bernardino County
    
    
    51
    
    
    
    41,446
    
    
    
    2.71
    %Orange County
    
    
    46
    
    
    
    42,532
    
    
    
    2.64
    %All Other Southern California Counties
    
    
    11
    
    
    
    22,590
    
    
    
    1.43
    %Total Southern California
    
    
    870
    
    
    
    659,073
    
    
    
    41.95
    %Northern California:San Francisco County
    
    
    45
    
    
    
    86,757
    
    
    
    5.52
    %Sacramento County
    
    
    16
    
    
    
    15,635
    
    
    
    1.00
    %Alameda County
    
    
    53
    
    
    
    54,131
    
    
    
    3.45
    %Fresno County
    
    
    48
    
    
    
    25,285
    
    
    
    1.61
    %San Mateo County
    
    
    9
    
    
    
    20,084
    

    
    
    1.28
    %Contra Costa County
    
    
    24
    
    
    
    22,965
    
    
    
    1.46
    %Kern County
    
    
    33
    
    
    
    19,030
    
    
    
    1.21
    %Solano County
    
    
    7
    
    
    
    16,961
    
    
    
    1.08
    %All Other Northern California Counties
    
    
    118
    
    
    
    106,864
    
    
    
    6.79
    %Total Northern California
    
    
    353
    
    
    
    367,712
    
    
    
    23.40
    %Outside California:Arizona
    
    
    165
    
    
    
    160,544
    
    
    
    10.22
    %Texas
    
    
    76
    
    
    
    59,797
    
    
    
    3.81
    %Washington
    
    
    24
    
    
    
    29,574
    
    
    
    1.88
    %Nevada
    
    
    71
    
    
    
    68,989
    
    
    
    4.39
    %Colorado
    
    
    66
    
    
    
    59,846
    
    
    
    3.81
    %Oregon
    
    
    41
    
    

    
    24,599
    
    
    
    1.57
    %Montana
    
    
    2
    
    
    
    11,643
    
    
    
    0.74
    %Utah
    
    
    15
    
    
    
    13,747
    
    
    
    0.87
    %Idaho
    
    
    7
    
    
    
    19,705
    
    
    
    1.25
    %Florida
    
    
    21
    
    
    
    23,650
    
    
    
    1.51
    %Georgia
    
    
    15
    
    
    
    12,807
    
    
    
    0.82
    %Other U.S. States
    
    
    87
    
    
    
    59,494
    
    
    
    3.78
    %Total Outside California
    
    
    590
    
    
    
    544,395
    
    
    
    34.65
    %1,813
    
    
    $
    1,571,180
    
    
    
    100.00
    %
 Although we generally seek to limit risks associated with our portfolio of real estate and
construction loans by limiting the geographic concentration and by varying the types of underlying
collateral, significant concentration risks still remain. Concentrations of loans in certain
geographic regions, for example, cause our risk associated with these loans to be closely
associated with the general economic and social environment of the region. Localized economic and
competitive conditions, natural disasters, possible terrorist activities or social conditions all
may affect the values of collateral located within a particular geographic area. In addition,
certain types of properties may be more or less subject to changes in prevailing economic,
competitive or social conditions. 27




---



##### Table of Contents



The following table sets forth certain information with respect to our loan originations and
purchases. Fundings related to the tax refund lending programs, and premiums paid and discounts
taken on loans purchased in the secondary market are not included below. As of and for the Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Gross real estate loans originated
    
    $
    721,090
    
    
    $
    599,885
    
    
    $
    412,332Gross film finance loans originated
    
    
    92,179
    
    
    
    90,528
    
    
    
    34,340Gross franchise loans originated
    
    
    52,145
    
    
    
    50,333
    
    
    
    Gross commercial and other loans originated
    
    
    58,342
    
    
    
    41,054
    
    
    
    4,195Gross film finance loans purchased
    
    
    
    
    
    
    
    
    
    
    (1) 92,584Gross franchise loans purchased
    
    
    
    
    
    
    7,244
    
    
    
    7,335Gross real estate loans purchased
    
    
    136,452
    
    
    
    46,809
    
    
    
    (1) 120,363Total loan production
    
    $
    1,060,208
    
    
    $
    835,853
    
    
    $
    671,149Gross loans at end of period
    
    $
    1,820,317
    
    
    $
    1,533,896
    
    
    $
    1,468,949Gross loans weighted-average portfolio yield
    
    
    7.20
    %
    
    
    7.81
    %
    
    
    8.20
    %Average size of loans originated and
retained in the Companys portfolio
    
    $
    919
    
    
    $
    943
    
    
    $
    1,062
   (1)
    
    Includes $36.8 million of gross real estate loans acquired in 2002 in connection with the
acquisition of Asahi Bank of California and $92.6 million of film finance loans acquired in
2002. Investment Securities At December 31, 2004, our investment securities totaled $362.7 million, or 15.65% of our total
assets. Our investment securities, including the mortgage-backed securities portfolio, are managed
in accordance with a written investment policy adopted by the Board of Directors. It is our general
policy to purchase U.S. Government securities and federal agency obligations and other investment
grade securities. At December 31, 2004 our entire mortgage-backed securities portfolio consisted of
securities issued by Fannie Mae. Our investment securities portfolio at December 31, 2004,
contained neither securities of any issuer nor tax-exempt securities with an aggregate book value
in excess of 10% of stockholders equity, excluding those issued by the United States Government,
or its agencies, or Fannie Mae. See Item 8. Financial Statements and
Supplementary Data-Notes to Consolidated Financial Statements-Note 3. The following table shows the amortized cost and approximate fair value of investment
securities at the dates indicated. December 31,2004
    
    
    2003
    
    
    2002Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value(in thousands)Investment securities available for saleU.S. Government Agency
    
    $
    61,637
    
    
    $
    61,347
    
    
    $
    47,749
    
    
    $
    47,621
    
    
    $
    48,698
    
    
    $
    48,986Residual interest in securitized loans
    
    
    5,055
    
    
    
    5,368
    
    
    
    5,055
    
    
    
    5,368
    
    
    
    5,305
    
    
    
    5,619Equity securities
    
    
    25
    
    
    
    130
    
    
    
    25
    
    
    
    104
    
    
    
    25
    
    
    
    72Total investment securities available for sale
    
    $
    66,717
    
    
    $
    66,845
    
    
    $
    52,829
    
    
    $
    53,093
    
    
    $
    54,028
    
    
    $
    54,677Investment securities held-to-maturityMortgage-backed securities
    
    $
    296,028
    
    
    $
    295,226
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 During the first quarter of 2002, we formed a limited liability company to issue $86.3 million
of asset-backed notes in a securitization of substantially all of its residential loan portfolio.
We recognized a gain of $3.7 million on the securitization of these loans which is included in
other non-interest income within the consolidated statements of income for 2002. Concurrent with
recognizing such gain on sale, we recorded a residual interest of $5.6 million, which represented
the present value of future cash flows (spread and fees) that were anticipated to be received over
the life of the loans. The residual interest is recorded on the consolidated balance sheets in the
Investment securities available for sale, at fair value. The value of the residual interest is
subject to substantial credit, prepayment, and interest rate risk on the sold residential loans. In
accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the residual interest is classified as available-for-sale and, as such,
recorded at fair value with the resultant changes in fair value recorded as unrealized gain or loss
in a separate component of shareholders equity in accumulated other comprehensive income or
loss, until realized. Fair value is determined on a monthly 28




---



##### Table of Contents



basis based on a discounted cash flow analysis. These cash flows are projected over the lives
of the receivables using prepayment, default, and interest rate assumptions that we believe market
participants would use for similar financial instruments. During 2004 and 2003, we recognized an other than temporary impairment of $1.0 million in
connection with its residual interest. Impairments that are deemed to be other than temporary are
charged to non-interest income. In evaluating impairments as other than temporary we consider
credit risk, as well as the magnitude and trend of default rates and prepayment speeds of the
underlying residential loans. At December 31, 2004 and 2003, key assumptions used to estimate the fair value of the residual
interest based on projected cash flows, and the sensitivity of the value to immediate adverse
changes in those assumptions were as follows: December 31, 2004
    
    
    December 31, 2003Dollars in thousandsFair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.68
    
    
    
    0.90Weighted average life (in years)  residual interest
    
    
    3.61
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    26.5
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (236
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (630
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (243
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (588
    )
    
    $
    (367
    )Weighted average lifetime credit losses
    
    
    25.0
    %
    
    
    25.0
    %Impact of 10% adverse change
    
    $
    (262
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (700
    )
    
    $
    (753
    )
 These sensitivities are hypothetical and should be used with caution. As the figures indicate,
changes in the fair value of the residual are based on a variation in assumptions and generally
cannot be extrapolated because the relationship of the change in assumption to the change in fair
value may not be linear. Also, in the above table, the effect of a variation in a particular
assumption on the fair value of the residual interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments but increased credit losses),
which might magnify or counteract the sensitivities, and depending on the severity of such changes,
the results of operations may be materially affected. The following table indicates the composition of the investment security portfolio assuming
these securities are held to maturity based on the final maturity of each investment.
Mortgage-backed securities are included in maturity categories based on their stated maturity date.
Expected maturities may differ from contractual maturities because issuers may have the right to
prepay obligations. Equity securities classified as available for sale have no maturity and are
included in the due in one year or less column. Due after One
    
    
    Due after FiveDue in One
    
    
    Year through
    
    
    Years through
    
    
    Due afterYear or Less
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten YearsWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Yield
    
    
    Balance
    
    
    Yield
    
    
    Balance
    
    
    Yield
    
    
    Balance
    
    
    YieldDecember 31, 2004Investment securities available for saleU.S. Government Agency
    
    $
    7,579
    
    
    
    2.60
    %
    
    $
    49,803
    
    
    
    2.77
    %
    
    $
    3,965
    
    
    
    2.00
    %
    
    $
    
    
    
    
    Equity securities
    
    
    130
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residual interest in securitized loans
    
    
    
    
    
    
    
    
    
    
    5,368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total investment securities available for sale
    
    $
    7,709
    
    
    
    
    
    
    $
    55,171
    
    
    
    
    
    
    $
    3,965
    
    
    
    
    
    
    $
    Investment securities held-to-maturityMortgages-backed securities
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    296,028
    
    
    
    4.11
    %
 29




---



##### Table of Contents



Liquidity and Deposit Accounts Liquidity refers to our ability to maintain cash flow adequate to fund operations and meet
obligations and other commitments on a timely basis, including the payment of maturing deposits and
the origination or purchase of new loans. We maintain a cash and investment securities portfolio
designed to satisfy operating and regulatory liquidity requirements while preserving capital and
maximizing yield. As of December 31, 2004 and 2003, the Banks liquidity ratios were 10.0% and
17.5%, respectively, exceeding the DFI regulatory requirement of 1.5%. In addition, our liquidity
position is supported by a credit facility with the FHLB of San Francisco. As of December 31, 2004,
we had remaining available borrowing capacity under this credit facility of $193.7 million, net of
the $9.5 million of additional FHLB Stock that we would be required to purchase to support those
additional borrowings, and $30.0 million of unused federal funds credit facilities under
established lines of credit with two banks. Additionally, we have a $25.0 million revolving credit
facility with an unaffiliated bank that expires on April 30, 2005. We intend on renewing this
revolving credit facility when it matures. Total deposit accounts increased approximately $285.0 million to $1.4 billion at December 31,
2004 from $1.1 billion at December 31, 2003. The increase in deposits in 2004 was primarily related
to an increase in time certificate of deposits of $231.1 million, an increase in interest bearing
demand deposit accounts of $34.3 million and an increase in money market and passbook accounts of
$15.6 million. Brokered deposits totaled $100.0 million and $126.8 million at December 31, 2004
and 2003, respectively. Total deposit accounts increased approximately $81.1 million to $1.15
billion at December 31, 2003 from $1.07 billion at December 31, 2002. In both 2004 and 2003, the
funds provided from deposits were used primarily to fund the growth in our loan portfolio. Although
we compete for deposits primarily on the basis of rates, based on our historical experience
regarding retention of deposits, management believes that a significant portion of deposits will
remain with us upon maturity on an ongoing basis. The following table sets forth information regarding deposits outstanding at the dates
indicated. December 31,2004
    
    
    2003
    
    
    2002(in thousands)Non-interest demand accounts
    
    $
    13,108
    
    
    $
    9,074
    
    
    $
    Interest demand accounts
    
    
    72,832
    
    
    
    38,518
    
    
    
    Money market and passbook accounts.
    
    
    172,092
    
    
    
    156,505
    
    
    
    168,525Time certificates under $100,000
    
    
    703,493
    
    
    
    564,207
    
    
    
    521,404Time certificates $100,000 and over
    
    
    470,507
    
    
    
    378,713
    
    
    
    375,982$
    1,432,032
    
    
    $
    1,147,017
    
    
    $
    1,065,911
 The following table sets forth the maturities of certificates of deposit $100,000 and over at
December 31, 2004 (in thousands): Certificates of deposit $100,000 and over:Maturing within three months
    
    $
    114,692After three but within six months
    
    
    103,966After six but within twelve months
    
    
    177,232After twelve months
    
    
    74,617$
    470,507
 Off-Balance Sheet Arrangements In the normal course of operations, we engage in a variety of financial transactions that, in
accordance with generally accepted accounting principles are not recorded in the financial
statements. These transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such transactions are used by us to meet the financing needs of our customers. Our off-balance sheet arrangements, which principally include lending commitments, are
described below. At December 31, 2004, we also had a residual interest of $5.4 million in a
qualified special purpose entity formed in 2002 to issue $86.3 million of asset-backed notes in a
securitization of substantially all of our residential loan portfolio, and a $2.6 million equity
interest in our deconsolidated trusts through which we have issued trust preferred securities. See
Notes 9 and 11 of our consolidated financial statements included in Item 8 of this report. Lending Commitments.Lending commitments include loan commitments and unused lines of credit.
The instruments are not recorded in the consolidated balance sheet until funds are advanced under
the commitments. We provide these lending commitments to customers in the normal course of
business. 30




---



##### Table of Contents



At December 31, 2004, our approved loan origination commitments outstanding totaled $248.0
million. Unfunded commercial lines of credit totaled $1.3 million. These lines of credit are
commitments for possible future extension of credit to existing customers. These lines of credit
are typically uncollateralized and usually do not contain a specified maturity date. We apply essentially the same credit policies and standards as we do in the lending process
when making these commitments. See Note 14 to the consolidated financial statements included in
Item 8 of this report for additional information regarding lending commitments. Contractual Obligations The following table shows our contractual obligations by expected payment period, as of
December 31, 2004. Further discussion of these commitments is included in Notes 7, 9, 10, and 15
to the consolidated financial statements included in Item 8 of this report. After One
    
    
    After ThreeOne Year
    
    
    Through
    
    
    Through
    
    
    More ThanTotal
    
    
    or Less
    
    
    Three Years
    
    
    Five Years
    
    
    Five YearsContractual Obligations
    
    (in thousands)Long-term FHLB advances and
other borrowings
    
    $
    387,024
    
    
    $
    68,100
    
    
    $
    289,918
    
    
    $
    29,006
    
    
    $
    Junior subordinated debentures
    
    
    86,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,600Operating lease obligations
    
    
    8,890
    
    
    
    3,230
    
    
    
    4,241
    
    
    
    1,329
    
    
    
    90Deposits with stated maturity dates
    
    
    1,174,000
    
    
    
    988,928
    
    
    
    161,696
    
    
    
    22,166
    
    
    
    1,210Purchase obligations
    
    
    1,837
    
    
    
    805
    
    
    
    1,032
    
    
    
    
    
    
    
    $
    1,658,351
    
    
    $
    1,061,063
    
    
    $
    456,887
    
    
    $
    52,501
    
    
    $
    87,900
 FHLB advances and other borrowings and junior subordinated debentures have defined terms and
under certain circumstances are callable at the option of the lender. Operating leases represent obligations entered into by us for office facilities. Certain of
these noncancelable operating leases contain rental escalation clauses based on increases in the
consumer price index. At the end of the lease obligations, renewal options may be exercised by us
for up to an additional ten years. Purchase obligations represent our contractual service and other operating and marketing
obligations. Capital Resources ITLA Capital, the Banks holding company, had Tier 1 leverage, Tier 1 risk based and total
risk-based capital ratios at December 31, 2004 of 12.3%, 13.7% and 16.0%, respectively, which
represents $151.3 million, $143.2 million and $112.2 million, respectively, of capital in excess of
the amount required to be well capitalized for bank holding company regulatory purposes. These
ratios were 14.2%, 15.6% and 18.2%, respectively, as of December 31, 2003. Portions of our trust
preferred securities presently qualify as Tier 1 and total risk-based capital. See Note 9 to our
consolidated financial statements included in Item 8 of this report. The Bank had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at
December 31, 2004 of 11.0%, 12.2% and 13.5%, respectively, which represents $121.2 million, $113.0
million and $63.1 million, respectively, of capital in excess of the amount required to be well
capitalized for regulatory purposes. These ratios were 13.2%, 14.3% and 15.6%, respectively, as of
December 31, 2003. Shareholders equity increased to $194.7 million at December 31, 2004 from $186.9 million at
December 31, 2003. The increase was primarily due to the retention of $30.6 million of net income
as retained earnings for the year and $7.6 million received from the exercise of employee stock
options, partially offset by the purchase of $30.3 million of our common stock currently held as
treasury stock. There were no dividends declared or paid by us during 2004. 31




---



##### Table of Contents



Credit Risk Elements Allowance for Loan Losses and Nonperforming Assets The following table provides certain information with respect to our total allowance for loan
losses, including charge-offs, recoveries and selected ratios, for the periods indicated. As of and for the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)Balance at beginning of year
    
    $
    33,401
    
    
    $
    33,009
    
    
    $
    26,650
    
    
    $
    27,186
    
    
    $
    19,895Provision for loan losses
    
    
    4,725
    
    
    
    7,760
    
    
    
    9,030
    
    
    
    4,575
    
    
    
    4,775Addition due to purchase of the ICCMAC Trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,614Additions due to acquisitions
    
    
    
    
    
    
    
    
    
    
    2,048
    
    
    
    
    
    
    
    Charge offs:Real estate loans
    
    
    (189
    )
    
    
    (5,286
    )
    
    
    (4,730
    )
    
    
    (2,845
    )
    
    
    (1,489
    )Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,419
    )
    
    
    (1,000
    )Film finance loans
    
    
    (2,180
    )
    
    
    (800
    )
    
    
    
    
    
    
    
    
    
    
    Franchise loans
    
    
    
    
    
    
    (661
    )
    
    
    
    
    
    
    
    
    
    
    Commercial and other loans
    
    
    (1,121
    )
    
    
    (700
    )
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (3,490
    )
    
    
    (7,447
    )
    
    
    (4,730
    )
    
    
    (5,264
    )
    
    
    (2,489
    )Recoveries:Real estate loans
    
    
    89
    
    
    
    14
    
    
    
    11
    
    
    
    153
    
    
    
    391Commercial and other loans
    
    
    758
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    847
    
    
    
    79
    
    
    
    11
    
    
    
    153
    
    
    
    391Net charge-offs
    
    
    (2,643
    )
    
    
    (7,368
    )
    
    
    (4,719
    )
    
    
    (5,111
    )
    
    
    (2,098
    )Balance at end of the year
    
    $
    35,483
    
    
    $
    33,401
    
    
    $
    33,009
    
    
    $
    26,650
    
    
    $
    27,186Average loans outstanding during the year
    
    $
    1,606,125
    
    
    $
    1,415,812
    
    
    $
    1,305,902
    
    
    $
    1,295,097
    
    
    $
    1,147,602Loans, net, at end of the year (1)
    
    $
    1,829,298
    
    
    $
    1,538,825
    
    
    $
    1,471,243
    
    
    $
    1,311,178
    
    
    $
    1,284,835Selected Ratios:Net charge-offs to average loans outstanding.
    
    
    0.16
    %
    
    
    0.52
    %
    
    
    0.36
    %
    
    
    0.39
    %
    
    
    0.18
    %Net charge-offs to loans, net (1)
    
    
    0.14
    %
    
    
    0.48
    %
    
    
    0.32
    %
    
    
    0.39
    %
    
    
    0.16
    %Allowance for loan losses to loans, net (1)
    
    
    1.94
    %
    
    
    2.14
    %
    
    
    2.31
    %
    
    
    2.16
    %
    
    
    2.12
    %Allowance for loan losses to nonaccrual loans
    
    
    242.17
    %
    
    
    392.26
    %
    
    
    555.61
    %
    
    
    174.30
    %
    
    
    149.85
    %
   (1)
    
    Loans, before allowance for loan losses and net of premium, deferred loan origination costs
and deferred loan fees. The allowance for loan losses increased to $35.5 million or 1.94% of our total loan portfolio
at December 31, 2004 from $33.4 million or 2.14% of our total loan portfolio at December 31, 2003.
The increase in the allowance was due primarily to the growth in our loan portfolio, which
increased $290.5 million in 2004 as compared to 2003. During 2004, we decreased our provision to
$4.7 million compared to $7.8 million in 2003. The current period provision for loan losses was
recorded to provide reserves adequate to support the known and inherent risk of loss in the loan
portfolio, and for specific reserves required as of December 31, 2004. The decline in the
provision for loan losses in 2004 as compared to 2003 reflects the overall geographic
diversification of our real estate loan portfolio and the increase in our small balance
multi-family loan portfolio caused by the national expansion of this lending platform. The allowance for loan losses increased to $33.4 million or 2.14% of our total loan portfolio
at December 31, 2003 from $33.0 million or 2.31% of our total loan portfolio at December 31, 2002.
The increase in the allowance was due primarily to the growth in our loan portfolio, which
increased $120.6 million in 2003 as compared to 2002. During 2003, we decreased our provision to
$7.8 million compared to $9.0 million in 2002. The 2003 provision for loan losses was recorded to
provide reserves adequate to support the known and inherent risk of loss in the loan portfolio, and
reflects the overall decline in total non-performing loans and other loans of concern from $41.4
million at December 31, 2002 to $39.8 million at December 31, 2003. 32




---



##### Table of Contents



The following table sets forth managements historical allocation of the allowance for loan
losses by loan or contract category and the percentage of gross loans in each category to total
gross loans at the dates indicated. December 31,2004
    
    

2003
    
    
    2002
    
    

2001
    
    
    2000Allowance
    
    
    
    
    
    
    Allowance
    
    
    
    
    
    
    Allowance
    
    
    
    
    
    
    Allowance
    
    
    
    
    
    
    Allowancefor loan
    
    
    % of loans
    
    
    for loan
    
    
    % of loans
    
    
    for loan
    
    
    % of loans
    
    
    for loan
    
    
    % of loans
    
    
    for loan
    
    
    % of loansLoan Category:
    
    losses
    
    
    (1)
    
    
    losses
    
    
    (1)
    
    
    losses
    
    
    (1)
    
    
    losses
    
    
    (1)
    
    
    losses
    
    
    (1)Secured by real estate
    
    $
    23,543
    
    
    
    66
    %
    
    $
    25,552
    
    
    
    76
    %
    
    $
    28,348
    
    
    
    86
    %
    
    $
    26,650
    
    
    
    100
    %
    
    $
    27,186
    
    
    
    100
    %Film finance
    
    
    7,828
    
    
    
    22
    %
    
    
    4,354
    
    
    
    13
    %
    
    
    2,961
    
    
    
    9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Franchise
    
    
    4,032
    
    
    
    11
    %
    
    
    3,185
    
    
    
    10
    %
    
    
    1,490
    
    
    
    5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and other
    
    
    80
    
    
    
    1
    %
    
    
    340
    
    
    
    1
    %
    
    
    210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    35,483
    
    
    
    100
    %
    
    $
    33,401
    
    
    
    100
    %
    
    $
    33,009
    
    
    
    100
    %
    
    $
    26,650
    
    
    
    100
    %
    
    $
    27,186
    
    
    
    100
    %
   (1) Percentage
represents the percent of gross loans in category to total gross
loans.
 Management believes the allowance for loan losses accounting policy is critical to the
portrayal and understanding of our financial condition and results of operations. As such,
selection and application of this critical accounting policy involves judgments, estimates, and
uncertainties that are susceptible to change. In the event that different assumptions or conditions
were to prevail, and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable likelihood. Management periodically assesses the adequacy of the allowance for loan losses by reference to
many quantitative and qualitative factors that may be weighted differently at various times depending on prevailing conditions.
These factors include, among other elements:  
    general portfolio trends relative to asset and portfolio size;
    asset categories;
    potential credit and geographic concentrations;
    delinquency trends and nonaccrual loan levels;
    historical loss experience and risks associated with changes in economic, social and business conditions; and
    the underwriting standards in effect when the loan was made. Accordingly, the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of nonperforming assets. The quantitative factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable risks); and
(2) homogeneous loans (groups of loan with similar characteristics). We base the allocation for
individual loans primarily on risk rating grades assigned to each of these loans as a result of our
loan management and review processes. We then assign each risk-rating grade a loss ratio, which is
determined based on the experience of management and our independent loan review process. We
estimate losses on impaired loans based on estimated cash flows discounted at the loans original
effective interest rate or based on the underlying collateral value. Based on managements
experience, we also assign loss ratios to groups of loans. These loss ratios are assigned to the
various homogenous categories of the portfolio. The
qualitative factors, included above, are
generally utilized to identify other risks inherent in the portfolio and to determine whether the
estimated credit losses associated with the current portfolio might differ from historical loss
trends. We estimate a range of exposure for each qualitative factor and evaluate the current
condition and trend of each factor. Based on this evaluation, we assign a positive, negative or
neutral grade to each factor to determine whether the portion of the qualitative reserve is in the
high, middle or low end of the range for each factor. Because of the subjective nature of these
factors and the judgments required to determine the estimated ranges, the actual losses incurred
can vary significantly from the estimated amounts. Management believes that our allowance for loan losses as of December 31, 2004 was adequate to
absorb the known and inherent risks of loss in the loan portfolio at that date. While management
believes the estimates and assumptions used in its determination of the adequacy of the allowance
are reasonable, there can be no assurance that such estimates and assumptions will not be proven
incorrect in the future, or that the actual amount of future provisions will not exceed the amount
of past provisions or that any increased provisions that may be required will not adversely impact
our financial condition and results of operations. In addition, the determination of the amount of
the Banks allowance for loan losses is subject to review by bank regulators, as part of the
routine examination process, which may result in the establishment of additional reserves based
upon their judgment of information available to them at the time of their examination. 33




---



##### Table of Contents



The following table sets forth the delinquency status of our loan portfolios at each of the
dates indicated. December 31,2004
    
    

2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossAmount
    
    
    Portfolio
    
    
    Amount
    
    
    Portfolio
    
    
    Amount
    
    
    Portfolio(dollars in thousands)Period of Delinquency30  59 days
    
    $
    16,684
    
    
    
    1.09
    %
    
    $
    21,455
    
    
    
    1.39
    %
    
    $
    17,500
    
    
    
    1.19
    %60  89 days
    
    
    6,018
    
    
    
    0.39
    %
    
    
    882
    
    
    
    0.06
    %
    
    
    148
    
    
    
    0.01
    %90 days or more
    
    
    9,401
    
    
    
    0.62
    %
    
    
    8,515
    
    
    
    0.55
    %
    
    
    5,941
    
    
    
    0.40
    %Total loans delinquent
    
    $
    32,103
    
    
    
    2.10
    %
    
    $
    30,852
    
    
    
    2.00
    %
    
    $
    23,589
    
    
    
    1.61
    %
 The increase in total delinquent loans in 2004 was due primarily to an increase of $5.4
million of past due film finance loans, partially offset by a $3.3 million decrease in past due
commercial real estate loans and an $800,000 decrease in past due franchise loans. We have established a policy that all loans greater than $2.5 million are reviewed annually.
This review usually involves obtaining updated information about the collateral and source of
repayment. In addition, independent outside consultants periodically review the Banks loan
portfolio and report findings to management and the audit committee of the Board of Directors.
Loans considered to warrant special attention are presented to the review and reserve committee,
which meets at least monthly to review the status of classified loans, consider new classifications
or declassifications, determine the need for and amount of any charge offs, and recommend to our
executive committee of the Board of Directors the level of allowance for loan losses to be
maintained. If management believes that the collection of the full amount of principal is unlikely
and the value of the collateral securing the obligation is insufficient, the difference between the
loan balance and the fair market value of the collateral are recognized by a partial charge-off of
the loan balance to the collaterals fair value. While real property collateral is held for sale,
it is subject to periodic evaluation and/or appraisal. If an evaluation or appraisal indicates that
the property will ultimately sell for less than our recorded value plus costs of disposition, the
loss is recognized by a charge to allowance for other real estate owned losses. Loans are placed on nonaccrual status when they become 90 days or more contractually
delinquent, or earlier if the collection of interest is considered by management to be doubtful,
unless the loan is considered well secured and in the process of collection. Subsequent cash
collections on nonaccrual loans are either recognized as interest income on a cash basis, if the
loan is well secured and in managements judgment the net book value is fully collectible, or
recorded entirely as a reduction of principal. The following table sets forth our nonperforming assets by category and troubled debt
restructurings as of the dates indicated: December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)Nonaccrual loans:(1)Real estate
    
    $
    7,057
    
    
    $
    4,686
    
    
    $
    3,913
    
    
    $
    13,690
    
    
    $
    9,430Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600
    
    
    
    8,712Franchise
    
    
    3,874
    
    
    
    799
    
    
    
    1,986
    
    
    
    
    
    
    
    Film finance
    
    
    3,721
    
    
    
    3,030
    
    
    
    
    
    
    
    
    
    
    
    Other real estate owned, net
    
    
    
    
    
    
    7,048
    
    
    
    12,593
    
    
    
    13,741
    
    
    
    2,250Total nonperforming assets
    
    
    14,652
    
    
    
    15,563
    
    
    
    18,492
    
    
    
    29,031
    
    
    
    20,392Accruing loans past-due 90 days or more with
respect to principal or interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,765Performing troubled debt restructurings
    
    
    8,811
    
    
    
    4,709
    
    
    
    7,858
    
    
    
    3,752
    
    
    
    3,002$
    23,463
    
    
    $
    20,272
    
    
    $
    26,350
    
    
    $
    32,783
    
    
    $
    33,159Nonaccrual loans to total gross loans
    
    
    0.80
    %
    
    
    0.55
    %
    
    
    0.36
    %
    
    
    1.17
    %
    
    
    1.42
    %Allowance for loan losses to nonaccrual loans
    
    
    242.17
    %
    
    
    392.26
    %
    
    
    555.61
    %
    
    
    174.30
    %
    
    
    149.85
    %Nonperforming assets to total assets
    
    
    0.63
    %
    
    
    0.86
    %
    
    
    1.08
    %
    
    
    1.92
    %
    
    
    1.44
    %
   (1)
    
    Includes four loans with a net book balance of $7.9 million that were nonperforming
troubled debt restructurings in 2004, three loans with a net book balance of $3.8 million that
were nonperforming troubled debt restructurings in 2003 and one loan with net book balance of
$1.4 million that was a nonperforming troubled debt restructuring in 2000. 34




---



##### Table of Contents



Gross interest income that would have been recorded on nonaccrual loans had they been current
in accordance with original terms was $784,000 and $608,000 for the years ended December 31, 2004
and 2003, respectively. The amount of interest income on such nonaccrual loans included in net
income for the years ended December 31, 2004 and 2003 was $63,000 and $290,000, respectively. For
the years ended December 31, 2004 and 2003, $1.1 million and $775,000, respectively, of gross
interest income would have been recorded had the restructured loans been current in accordance with
their original terms compared to $734,000 and $696,000, respectively, of interest income that was
included in net income for the same periods. In 2004, $1.8 million of new other real estate owned was acquired, $7.9 million of other real
estate owned was sold, and a provision for other real estate owned of $1.0 million was recorded,
resulting in no other real estate owned at December 31, 2004. As of December 31, 2004, we had loans with an aggregate outstanding balance of $37.1 million
with respect to which known information concerning possible credit problems with the borrowers or
the cash flows of the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan repayment terms, which may
result in the future inclusion of such loans in the non-accrual loan category. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We realize income principally from the differential or spread between the interest earned on
loans, investments and other interest-earning assets and the interest paid on deposits and
borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits
and borrowings, are affected by market interest rates. Additionally, because of the terms and
conditions of many of our loan agreements and deposit accounts, a change in interest rates could
also affect the duration of the loan portfolio and/or the deposit base, which could alter our
sensitivity to future changes in interest rates. Interest rate risk management focuses on maintaining consistent growth in net interest income
within board-approved policy limits while taking into consideration, among other factors, our
overall credit, operating income, operating cost and capital profile. The asset/liability
management committee, which includes senior management representatives and reports to the Board of
Directors, monitors and manages interest rate risk to maintain an acceptable level of change in net
interest income as a result of changes in interest rates. See Item 1. Business  Nonperforming
Assets and Other Loans of Concern. In evaluating our exposure to changes in interest rates, certain risks inherent in the method
of analysis presented in the following tables must be considered. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they may react in
different degrees and at different times to changes in market rates. Additionally, loan prepayments
and early withdrawals of time certificates could cause interest sensitivities to vary from those
that appear in the following table. Further, certain assets, such as variable rate real estate
loans, have features that restrict changes in interest rates on a short-term basis and over the
life of the asset. The majority of our variable rate real estate loans may not adjust downward
below their initial rate, with increases generally limited to maximum adjustments of 2% per year
and up to 5% over the life of the loan. These loans may also be subject to prepayment penalties. At
December 31, 2004, 43.9% of our variable rate loan portfolio would not adjust downward below the
initial interest rate with the weighted-average minimum interest rate on this portfolio being 6.32%
and 82.3% of the total loans outstanding had a lifetime interest rate cap, with the
weighted-average lifetime interest rate cap on this portfolio being 11.25%. The anticipated effects
of these various factors are considered by management in implementing interest rate risk management
activities. We use an internal earnings simulation model as a tool to identify and manage our interest
rate risk profile. The model is based on projected cash flows and repricing characteristics for all
financial instruments and incorporates market-based assumptions regarding the impact of changing
interest rates on current volumes of applicable financial instruments, considering applicable
interest rate floors and caps and prepayment penalties associated with each financial instrument.
These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net
interest income or precisely predict the impact of changes in interest rates on net interest
income. Actual results will differ from simulated results due to timing, magnitude and frequency of
interest rate changes as well as changes in market conditions and management strategies. The following table shows our estimated earnings sensitivity profile to immediate, parallel
shifts in interest rates as of December 31, 2004: Changes in
    
    Percentage Change inInterest rates
    
    Net Interest Income(Basis Points)
    
    (12 Months)+ 200 Over One Year
    
    
    3.45
    %+ 100 Over One Year
    
    
    1.59
    %- 100 Over One Year
    
    
    -0.89
    %- 200 Over One Year
    
    
    1.51
    %
 35




---



##### Table of Contents



Another tool used to identify and manage our interest rate risk profile is the static gap
analysis. Interest sensitivity gap analysis measures the difference between the assets and
liabilities repricing or maturing within specific time periods. Although our cumulative GAP
position indicates an asset-sensitive position, our loan portfolio has reached floor interest rates
in excess of current market rates to such an extent that a 50 basis point increase in rates does
not cause our assets to reprice. Our liabilities within the cumulative GAP period reprice upward to
market rates under this scenario causing compression of net interest income. In a declining rate
environment, our liabilities will continue to reprice downward, while our loan portfolio remains at
its floor rates, creating an increase in net interest income. The following table presents an estimate of our static GAP analysis as of December 31, 2004. Maturing or Repricing inAfter 3
    
    
    After 1 Year3 months
    
    
    Months But
    
    
    But Within
    
    
    After
    
    
    Non-Interestor less
    
    
    Within 1 year
    
    
    5 Years
    
    
    5 Years
    
    
    Sensitive
    
    
    Total(dollars in thousands)AssetsLoans (1)
    
    $
    979,622
    
    
    $
    738,973
    
    
    $
    92,763
    
    
    $
    17,940
    
    
    $
    
    
    
    $
    1,829,298Cash and cash equivalents
    
    
    78,171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,409
    
    
    
    87,580Investment securities available for sale
    
    
    18,787
    
    
    
    17,214
    
    
    
    30,691
    
    
    
    
    
    
    
    153
    
    
    
    66,845Investment securities held-to-maturity
    
    
    12,223
    
    
    
    33,676
    
    
    
    250,129
    
    
    
    
    
    
    
    
    
    
    
    296,028Noninterest-earning assets less allowance
for loan losses and unearned fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,320
    
    
    
    38,320Total assets
    
    $
    1,088,803
    
    
    $
    789,863
    
    
    $
    373,583
    
    
    $
    17,940
    
    
    $
    47,882
    
    
    $
    2,318,071Liabilities and Shareholders EquityTime certificates under $100,000
    
    $
    168,733
    
    
    $
    421,063
    
    
    $
    113,697
    
    
    $
    
    
    
    $
    
    
    
    $
    703,493Time certificates $100,000 and more
    
    
    114,692
    
    
    
    281,198
    
    
    
    74,617
    
    
    
    
    
    
    
    
    
    
    
    470,507Money market and passbook accounts
    
    
    172,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,092Demand deposit accounts
    
    
    72,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,108
    
    
    
    85,940FHLB advances and other borrowings
    
    
    174,300
    
    
    
    98,520
    
    
    
    311,404
    
    
    
    
    
    
    
    
    
    
    
    584,224Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,491
    
    
    
    20,491Junior subordinated debentures
    
    
    25,774
    
    
    
    30,929
    
    
    
    
    
    
    
    29,897
    
    
    
    
    
    
    
    86,600Shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,724
    
    
    
    194,724Total liabilities and shareholders equity
    
    $
    728,423
    
    
    $
    831,710
    
    
    $
    499,718
    
    
    $
    29,897
    
    
    $
    228,323
    
    
    $
    2,318,071Net repricing assets over (under)
repricing liabilities equals interest
rate sensitivity GAP
    
    $
    360,380
    
    
    $
    (41,847
    )
    
    $
    (126,135
    )
    
    $
    (11,957
    )
    
    $
    (180,441
    )Cumulative interest rate sensitivity GAP
    
    $
    360,380
    
    
    $
    318,533
    
    
    $
    192,398
    
    
    $
    180,441
    
    
    $
    Cumulative GAP as a percentage of total
assets
    
    
    15.5
    %
    
    
    13.7
    %
    
    
    8.3
    %
    
    
    7.8
    %
    
    
    
    %
   (1)
    
    Adjustable rate loans consist principally of real estate secured loans with a maximum term of
30 years. Approximately 84.8% of these loans are generally adjustable on a quarterly or
semi-annual basis, subject generally to a maximum increase of 2% annually and up to 5% for the
life of the loan. Approximately 13.4% of these loans are fixed for an initial period of three
to five years from origination, and then are adjustable on a quarterly or semi-annual basis
based on changes in various indexes. Nonaccrual loans of approximately $14.7 million are
assumed to reprice after five years. 36




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageManagements Report on Internal Control Over Financial Reporting
    
    
    38Reports of Independent Registered Public Accounting Firm
    
    
    39Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    41Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    42Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for
the Years Ended December 31, 2004, 2003 and 2002
    
    
    43Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    44Notes to Consolidated Financial Statements
    
    
    45
 37




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The
Companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2004 based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2004. Managements assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included elsewhere herein. /s/ George W. HaligowskiGeorge W. HaligowskiChairman of the Board, President andChief Executive Officer/s/ Timothy M. DoyleTimothy M. DoyleSenior Managing Director andChief Financial Officer
 38




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of ITLA Capital Corporation: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that ITLA Capital Corporation (the Company) maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that ITLA Capital Corporation maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, ITLA Capital Corporation maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003 and the
related consolidated statements of income, changes in shareholders equity and comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2004 of ITLA
Capital Corporation and our report dated March 8, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Los Angeles, CA
March 8, 2005 39




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of
ITLA Capital Corporation: We have audited the accompanying consolidated balance sheets of ITLA Capital Corporation and
subsidiaries (the Company), a Delaware corporation, as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in shareholders equity and comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ITLA Capital Corporation and subsidiaries
at December 31, 2004 and 2003, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States. As are further described in Note 1 to the consolidated financial statements, at December 31, 2003
the Company adopted FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities,
as revised, which required the deconsolidation of its trust subsidiaries that had issued its
mandatorily redeemable preferred securities and to which the Company issued its junior subordinated
debentures. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of ITLA Capital Corporation and subsidiaries internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 8, 2005 expressed an unqualified opinion thereon. /s/ Ernst &Young LLP Los Angeles, California
March 8, 2005 40




---



##### Table of Contents



ITLA CAPITAL CORPORATION
AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 December 31,2004
    
    
    2003(in thousands exceptshare amounts)AssetsCash and cash equivalents
    
    $
    87,580
    
    
    $
    178,318Investment securities available for sale, at fair value
    
    
    66,845
    
    
    
    53,093Investment securities held-to-maturity, at amortized cost (fair value approximates $295,226 in 2004)
    
    
    296,028
    
    
    
    Stock in Federal Home Loan Bank
    
    
    23,200
    
    
    
    17,966Loans, net (net of allowance for loan losses of $35,483 and $33,401 in 2004 and 2003, respectively).
    
    
    1,793,815
    
    
    
    1,505,424Interest receivable
    
    
    10,695
    
    
    
    8,958Other real estate owned, net
    
    
    
    
    
    
    7,048Premises and equipment, net
    
    
    6,645
    
    
    
    5,766Deferred income taxes
    
    
    10,468
    
    
    
    11,609Goodwill
    
    
    3,118
    
    
    
    3,118Other assets
    
    
    19,677
    
    
    
    26,915Total assets
    
    $
    2,318,071
    
    
    $
    1,818,215Liabilities and Shareholders EquityLiabilities:Deposit accounts
    
    $
    1,432,032
    
    
    $
    1,147,017Federal Home Loan Bank advances and other borrowings
    
    
    584,224
    
    
    
    362,135Collateralized mortgage obligations
    
    
    
    
    
    
    15,868Accounts payable and other liabilities
    
    
    20,491
    
    
    
    19,696Junior subordinated debentures
    
    
    86,600
    
    
    
    86,600Total liabilities
    
    
    2,123,347
    
    
    
    1,631,316Commitments and contingencies (note 15)Shareholders equity:Preferred stock, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Contributed capital  common stock, $.01 par value; 20,000,000 shares authorized, 8,703,894 and
8,447,294 issued in 2004 and 2003, respectively
    
    
    69,327
    
    
    
    61,704Retained earnings
    
    
    196,032
    
    
    
    165,407Accumulated other comprehensive income, net
    
    
    78
    
    
    
    155265,437
    
    
    
    227,266Less treasury stock, at cost  3,154,290 and 2,475,689 shares in 2004 and 2003, respectively
    
    
    (70,713
    )
    
    
    (40,367
    )Total shareholders equity
    
    
    194,724
    
    
    
    186,899Total liabilities and shareholders equity
    
    $
    2,318,071
    
    
    $
    1,818,215
 See accompanying notes to the consolidated financial statements. 41




---



##### Table of Contents



ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands except pershare amounts)Interest income:Loans receivable, including fees
    
    $
    115,663
    
    
    $
    110,578
    
    
    $
    107,133Cash, cash equivalents and investment securities
    
    
    9,291
    
    
    
    5,399
    
    
    
    3,475Total interest income
    
    
    124,954
    
    
    
    115,977
    
    
    
    110,608Interest expense:Deposit accounts
    
    
    27,916
    
    
    
    24,616
    
    
    
    29,349Federal Home Loan Bank advances and other borrowings
    
    
    7,272
    
    
    
    5,175
    
    
    
    5,672Collateralized mortgage obligations
    
    
    71
    
    
    
    1,076
    
    
    
    2,301Junior subordinated debentures
    
    
    6,159
    
    
    
    
    
    
    
    Total interest expense
    
    
    41,418
    
    
    
    30,867
    
    
    
    37,322Net interest income before provision for loan losses
    
    
    83,536
    
    
    
    85,110
    
    
    
    73,286Provision for loan losses
    
    
    4,725
    
    
    
    7,760
    
    
    
    9,030Net interest income after provision for loan losses
    
    
    78,811
    
    
    
    77,350
    
    
    
    64,256Non-interest income:Premium on sale of loans, net
    
    
    9,284
    
    
    
    8,983
    
    
    
    Late and collection fees
    
    
    338
    
    
    
    252
    
    
    
    201Other
    
    
    4,886
    
    
    
    6,005
    
    
    
    172Total non-interest income
    
    
    14,508
    
    
    
    15,240
    
    
    
    373Non-interest expense:Compensation and benefits
    
    
    21,444
    
    
    
    18,870
    
    
    
    13,954Occupancy and equipment
    
    
    5,924
    
    
    
    4,839
    
    
    
    3,165Other
    
    
    14,666
    
    
    
    13,006
    
    
    
    9,913Total general and administrative
    
    
    42,034
    
    
    
    36,715
    
    
    
    27,032Real estate owned expense, net
    
    
    127
    
    
    
    382
    
    
    
    632Provision for losses on other real estate owned
    
    
    1,000
    
    
    
    870
    
    
    
    796Gain on sale of other real estate owned
    
    
    (415
    )
    
    
    (40
    )
    
    
    (105
    )Total real estate owned expense
    
    
    712
    
    
    
    1,212
    
    
    
    1,323Total non-interest expense
    
    
    42,746
    
    
    
    37,927
    
    
    
    28,355Income before provision for income taxes and minority interest in income of subsidiary
    
    
    50,573
    
    
    
    54,663
    
    
    
    36,274Minority interest in income of subsidiary
    
    
    
    
    
    
    6,083
    
    
    
    3,481Income before provision for income taxes
    
    
    50,573
    
    
    
    48,580
    
    
    
    32,793Provision for income taxes
    
    
    19,948
    
    
    
    18,946
    
    
    
    12,788NET INCOME
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005BASIC EARNINGS PER SHARE
    
    $
    5.04
    
    
    $
    4.91
    
    
    $
    3.35DILUTED EARNINGS PER SHARE
    
    $
    4.75
    
    
    $
    4.55
    
    
    $
    3.16
 See accompanying notes to the consolidated financial statements. 42




---



##### Table of Contents



ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
 Common StockNumber of shares
    
    
    Shareholders EquityGross
    
    
    
    
    
    
    Net
    
    
    Contributed Capital
    
    
    AccumulatedShares
    
    
    
    
    
    
    Shares
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Other
    
    
    TreasuryIssued and
    
    
    Treasury
    
    
    Issued and
    
    
    Share
    
    
    Earned
    
    
    Contributed
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock,Outstanding
    
    
    Shares
    
    
    Outstanding
    
    
    Capital
    
    
    Compensation
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    Total(in thousands except share amounts)Balance at January 1, 2002
    
    
    8,212,749
    
    
    
    (2,354,056
    )
    
    
    5,858,693
    
    
    $
    56,569
    
    
    $
    1,614
    
    
    $
    58,183
    
    
    $
    115,768
    
    
    $
    (7
    )
    
    $
    (36,015
    )
    
    $
    137,929Issuance of common stock -
employee stock options
    
    
    13,665
    
    
    
    
    
    
    
    13,665
    
    
    
    184
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184Earned compensation from
Supplemental Executive
Retirement Plan
/Recognition and Retention
Plan, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    474
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Common stock repurchased
    
    
    
    
    
    
    (93,600
    )
    
    
    (93,600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,343
    )
    
    
    (2,343
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,005
    
    
    
    
    
    
    
    
    
    
    
    20,005Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442
    
    
    
    
    
    
    
    442Balance at December 31, 2002
    
    
    8,226,414
    
    
    
    (2,447,656
    )
    
    
    5,778,758
    
    
    
    56,753
    
    
    
    2,088
    
    
    
    58,841
    
    
    
    135,773
    
    
    
    435
    
    
    
    (38,358
    )
    
    
    156,691Issuance of common
stock-employee stock
options
    
    
    220,880
    
    
    
    
    
    
    
    220,880
    
    
    
    2,897
    
    
    
    
    
    
    
    2,897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,897Earned compensation from
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan, net
    
    
    
    
    
    
    24,919
    
    
    
    24,919
    
    
    
    
    
    
    
    (34
    )
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    224
    
    
    
    190Common stock repurchased
    
    
    
    
    
    
    (52,952
    )
    
    
    (52,952
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,233
    )
    
    
    (2,233
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,634
    
    
    
    
    
    
    
    
    
    
    
    29,634Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )
    
    
    
    
    
    
    (280
    )Balance at December 31, 2003
    
    
    8,447,294
    
    
    
    (2,475,689
    )
    
    
    5,971,605
    
    
    
    59,650
    
    
    
    2,054
    
    
    
    61,704
    
    
    
    165,407
    
    
    
    155
    
    
    
    (40,367
    )
    
    
    186,899Issuance of common stock-
employee stock options, net
    
    
    256,600
    
    
    
    
    
    
    
    256,600
    
    
    
    7,477
    
    
    
    
    
    
    
    7,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,477Earned compensation from
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146Common stock repurchased
    
    
    
    
    
    
    (678,601
    )
    
    
    (678,601
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,346
    )
    
    
    (30,346
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,625
    
    
    
    
    
    
    
    
    
    
    
    30,625Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    (77
    )Balance at December 31, 2004
    
    
    8,703,894
    
    
    
    (3,154,290
    )
    
    
    5,549,604
    
    
    $
    67,127
    
    
    $
    2,200
    
    
    $
    69,327
    
    
    $
    196,032
    
    
    $
    78
    
    
    $
    (70,713
    )
    
    $
    194,724
   [Continued from above table, first column(s) repeated] Comprehensive IncomeReclassification ofRealized GainsUnrealized
    
    
    PreviouslyGain (Loss)
    
    
    Recognized in
    
    
    TotalNet
    
    
    on Securities,
    
    
    Comprehensive
    
    
    ComprehensiveIncome
    
    
    Net of Tax
    
    
    Income, Net of Tax
    
    
    IncomeBalance at January 1, 2002Issuance of common stock -
employee stock optionsEarned compensation from
Supplemental Executive
Retirement Plan
/Recognition and Retention
Plan, netCommon stock repurchasedNet incomeOther comprehensive income
    
    $
    20,005
    
    
    $
    442
    
    
    $
    
    
    
    $
    20,447Balance at December 31, 2002Issuance of common
stock-employee stock
optionsEarned compensation from
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan, netCommon stock repurchasedNet incomeOther comprehensive income
    
    $
    29,634
    
    
    $
    (280
    )
    
    $
    
    
    
    $
    29,354Balance at December 31, 2003Issuance of common stock-
employee stock options, netEarned compensation from
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan, netCommon stock repurchasedNet income
    
    $
    30,625
    
    
    $
    (77
    )
    
    $
    
    
    
    $
    30,548Other comprehensive incomeBalance at December 31, 2004
 See accompanying notes to the consolidated financial statements. 43




---



##### Table of Contents



ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Cash Flows From Operating Activities:Net Income
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of premises and equipment
    
    
    2,086
    
    
    
    1,722
    
    
    
    946Amortization of premium on purchased loans
    
    
    2,196
    
    
    
    2,136
    
    
    
    1,859Amortization of deferred loan origination fees, net of costs
    
    
    (1,794
    )
    
    
    (2,390
    )
    
    
    (1,688
    )Provision for loan losses
    
    
    4,725
    
    
    
    7,760
    
    
    
    9,030Provision for losses on other real estate owned
    
    
    1,000
    
    
    
    870
    
    
    
    796Premium on sale of RAL loans, net
    
    
    (9,284
    )
    
    
    (8,983
    )
    
    
    Deferred income tax expense (benefit)
    
    
    1,198
    
    
    
    2,399
    
    
    
    (2,255
    )Other, net
    
    
    2,565
    
    
    
    544
    
    
    
    63(Increase) decrease in interest receivable
    
    
    (1,737
    )
    
    
    200
    
    
    
    1,986Decrease (increase) in other assets
    
    
    7,238
    
    
    
    (13,795
    )
    
    
    363Increase (decrease) in accounts payable and other liabilities
    
    
    795
    
    
    
    9,690
    
    
    
    (368
    )Net cash provided by operating activities
    
    
    39,613
    
    
    
    29,787
    
    
    
    30,737Cash Flows From Investing Activities:Proceeds from securitization and sale of real estate loans
    
    
    
    
    
    
    
    
    
    
    98,155Purchases of investment securities available for sale
    
    
    (45,269
    )
    
    
    (55,395
    )
    
    
    (102,462
    )Proceeds from the maturity and calls of investment securities available for sale
    
    
    31,048
    
    
    
    55,894
    
    
    
    78,705Purchases of investment securities held-to-maturity
    
    
    (306,047
    )
    
    
    
    
    
    
    Proceeds from the maturity and redemption of investment securities held-to-maturity
    
    
    10,066
    
    
    
    
    
    
    
    Purchase of stock in Federal Home Loan Bank
    
    
    (4,462
    )
    
    
    (479
    )
    
    
    (3,470
    )Purchase of loans
    
    
    (139,486
    )
    
    
    (54,053
    )
    
    
    (90,909
    )Origination of RAL loans
    
    
    (12,949,433
    )
    
    
    (11,387,171
    )
    
    
    Proceeds from the participation in RAL loans
    
    
    12,958,717
    
    
    
    11,396,154
    
    
    
    Increase in loans, net
    
    
    (155,887
    )
    
    
    (24,154
    )
    
    
    (45,993
    )Proceeds from sale of other real estate owned
    
    
    8,318
    
    
    
    8,226
    
    
    
    3,972Cash paid for capital expenditures
    
    
    (2,965
    )
    
    
    (3,291
    )
    
    
    (2,859
    )Cash paid to
acquire Lewis Horwitz Organization, net
    
    
    
    
    
    
    
    
    
    
    (93,042
    )Cash paid to acquire Asahi Bank of California, net
    
    
    

    
    
    
    
    
    
    
    (14,872
    )Net cash used in investing activities
    
    
    (595,400
    )
    
    
    (64,269
    )
    
    
    (172,775
    )Cash Flows From Financing Activities:Proceeds from exercise of employee stock options
    
    
    4,159
    
    
    
    2,897
    
    
    
    184Cash paid to acquire treasury stock
    
    
    (30,346
    )
    
    
    (2,233
    )
    
    
    (2,343
    )Repayment of Asahi repurchase agreement, net
    
    
    
    
    
    
    
    
    
    
    (14,693
    )Proceeds from issuance of trust preferred securities
    
    
    
    
    
    
    
    
    
    
    53,348Principal payments on collateralized mortgage obligations
    
    
    (15,868
    )
    
    
    (53,268
    )
    
    
    (40,739
    )Increase in deposit accounts
    
    
    285,015
    
    
    
    81,106
    
    
    
    103,488Net (repayments of) proceeds from short-term borrowings
    
    
    (85,000
    )
    
    
    64,000
    
    
    
    9,700Proceeds from long-term borrowings
    
    
    363,689
    
    
    
    16,000
    
    
    
    109,700Repayments of long-term borrowings
    
    
    (56,600
    )
    
    
    (56,550
    )
    
    
    (50,000
    )Net cash provided by financing activities
    
    
    465,049
    
    
    
    51,952
    
    
    
    168,645Net (decrease) increase in cash and cash equivalents
    
    
    (90,738
    )
    
    
    17,470
    
    
    
    26,607Cash and cash equivalents, beginning of period
    
    
    178,318
    
    
    
    160,848
    
    
    
    134,241Cash and cash equivalents, end of period
    
    $
    87,580
    
    
    $
    178,318
    
    
    $
    160,848Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    40,759
    
    
    $
    31,181
    
    
    $
    36,753Cash paid during the period for income taxes
    
    $
    14,329
    
    
    $
    19,965
    
    
    $
    15,247Non-cash Investing Transactions:Loans transferred to other real estate owned
    
    $
    1,855
    
    
    $
    9,609
    
    
    $
    3,515Loans to facilitate the sale of other real estate owned
    
    $
    1,759
    
    
    $
    6,098
    
    
    $
    2,860
 See accompanying notes to the consolidated financial statements. 44




---



##### Table of Contents



ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization- ITLA Capital Corporation and subsidiaries (ITLA Capital or the Company) is
primarily engaged in the origination of real estate loans secured by income producing real estate
and, to a lesser extent, the origination of franchise, and film finance loans. Through our
principal operating subsidiary, Imperial Capital Bank (Imperial or the Bank), the Company
accepts deposits insured by the Federal Deposit Insurance Corporation (FDIC) which are used
primarily to fund the investment in variable rate loans. The Company also holds certain
multi-family and commercial real estate loans through its subsidiary, Imperial Capital Real Estate
Investment Trust (Imperial Capital REIT). In 2002, we formed ITLA Capital Statutory Trust III (Trust III), ITLA Capital Statutory
Trust IV ( Trust IV), and ITLA Capital Statutory Trust V (Trust V), and in 2001 and 2000, we
formed ITLA Capital Statutory Trust II (Trust II) and ITLA Capital Statutory Trust I (Trust I),
respectively. Collectively, these trusts are referred to as the Trusts. The Trusts were
established solely for the purpose of issuing Guaranteed Preferred Beneficial Interests in the
Companys Junior Subordinated Deferrable Interest Debentures (the Trust Preferred securities). As
discussed further in the new accounting pronouncement section below,
and in Note 9 - Junior
subordinated debentures, the Company deconsolidated the Trusts as of December 31, 2003. As a
result, at December 31, 2003, the Company recorded the $86.6 million of underlying debentures
issued by the Company to the Trusts as Junior subordinated debentures and $2.6 million of the
Companys investment in the Trusts and $2.1 million of deferred debt issuance costs as Other
assets in the consolidated balance sheet. As of January 1, 2004, amounts paid relating to the
debentures were recognized as interest expense in the income statement. The entries recorded in
connection with the deconsolidation of the Trusts are non-cash investing transactions for cash flow
purposes. In November 2002, the Company entered into a strategic business relationship with various
subsidiaries of Household International, Inc. (Household) relating to certain tax refund
products. In connection with this relationship, the Bank originated tax refund anticipation loans
(RAL) and sold Household a non-recourse participation interest representing substantially all of
the outstanding loan balance. Under the agreement, Household supported the Banks credit
administration, compliance, treasury, and accounting functions with a range of services relating to
the administration of this program. Household also serviced the loans on behalf of the Bank. The
Company also entered into an agreement in December 2002 with Household pursuant to which the Bank
originated private label commercial revolving credit loans to small businesses. This agreement was
for a two-year term. These loans were used primarily to fund purchases from major retailers.
Pursuant to this agreement, the Bank sold Household a non-recourse participation interest
representing substantially all of the outstanding loan balance. During 2004, Household and its
affiliates terminated their RAL and private label commercial credit loan programs with the Bank. As of December 31, 2004 and 2003, the Bank had no tax refund anticipation loans (RAL)
outstanding and none and $5.8 million, respectively, of private label commercial revolving loans
outstanding. For the year ended December 31, 2004 and 2003, fee income earned in connection with
the RAL program, consisted of approximately $9.3 million and $9.0 million, respectively, of net
premiums on the sale of RAL loans and $4.6 million and $4.6 million, respectively, of processing
and administrative fees. Because the RAL program related to the filing of income tax returns,
transaction activity was concentrated during the tax season. This resulted in the Company earning
substantially all of its RAL program income in the first quarter of each year. Imperial began operating as a California industrial bank in 1974, and became a publicly traded
company in October 1995, when its shares were sold in an initial public offering. Imperial operates
six retail branches in California and one branch in Nevada, along with twenty-six loan production
offices serving the Western United States, the Southeast region, the Mid-Atlantic region, the Ohio
Valley, the Metro New York area and New England. In December 2002, the Bank received regulatory approval to convert to a California state
chartered commercial bank from a California industrial bank. In addition, ITLA Capital was approved
by the Federal Reserve Bank to become a bank holding company. The Bank began operating as a
commercial bank and ITLA Capital became a bank holding company in January 2003. 45




---



##### Table of Contents



Financial Statement Presentation The accounting and reporting policies of the Company
conform to accounting principles generally accepted in the United States (GAAP) and to prevailing
practices within the financial services industry. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions
and balances have been eliminated. Certain amounts in prior periods have been reclassified to
conform to the presentation in the current period. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Cash and Cash Equivalents We consider all highly liquid investments with original maturities
of three months or less to be cash equivalents. Investment Securities Investment securities available for sale are carried at fair value
with unrealized gains or losses reported net of taxes as a component of other comprehensive income
(loss) until realized. Realized gains and losses are determined using the specific identification
method. Investment securities held-to-maturity represent investments that the Company has the
ability and intent to hold to maturity. These investments are reported at cost and are adjusted for
the accretion and amortization of premiums and discounts on the effective interest method. Loans Loans, which include real estate loans, franchise loans, film finance loans, and
commercial and other loans, are generally carried at principal amounts outstanding plus purchase
premiums, less charge-offs, net deferred loan origination fees and other unearned income. Deferred
loan origination fees and other unearned income include deferred unamortized fees net of direct
incremental loan origination costs. Interest income is accrued as earned. Net purchase premiums or
discounts and deferred loan origination fees are amortized or accreted into interest income using
the interest method. Premium on the sale of loans consists entirely of income earned in connection
with the sale of refund anticipation loans to Household and recognized as income at the time the
loans were purchased by Household. Loans are placed on nonaccrual status when they become 90 days or more contractually
delinquent or earlier if the collection of interest is considered by management to be unlikely.
When a loan is placed on nonaccrual status, all previously accrued but uncollected interest is
reversed against current period operating results. Subsequent cash collections on nonaccrual loans
are either recognized as interest income on a cash basis if the loan is well secured and in
managements judgment the net book value is fully collectible, or recorded as a reduction of
principal. Loans are considered impaired when, based upon current information and events, it is probable
that the Company will be unable to collect all principal and interest amounts due according to the
original contractual terms of the loan agreement on a timely basis. The Company evaluates
impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is
measured based on the present value of the expected future cash flows discounted at the loans
effective interest rate or by using the loans most recent market price or the fair value of the
collateral if the loan is collateral dependent. When the measurement of an impaired loan is less than the recorded amount of the loan, a
valuation allowance is established by recording a charge to the provision for loan losses.
Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by
adjusting the existing valuation allowance for the impaired loan with a corresponding charge or
credit to the provision for loan losses. Our policy for recognizing interest income on impaired loans is the same as that for
nonaccrual loans. Allowance for Loan Losses We maintain an allowance for loan losses at a level considered
adequate to cover probable losses on loans. In evaluating the adequacy of the allowance for loan
losses, management estimates the amount of the loss for each loan that has been identified as
having more than standard credit risk. Those estimates give consideration to, among other factors,
economic conditions, estimated real estate collateral value and cash flow, and the financial
strength and commitment of the borrower or guarantors, where appropriate. Additionally, an estimate
for loan loss is calculated for the remaining portion of the portfolio giving consideration to the
Companys historical loss experience in the portfolio, adjusted, as appropriate, for the estimated
effects of current economic conditions and changes in the composition of the loan portfolio over
time. Loan losses are charged against the allowance when management believes the uncollectibility
of a loan balance, or portion thereof, has been confirmed. 46




---



##### Table of Contents



Other Real Estate Owned Other real estate owned (OREO) represents real estate acquired
through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value
less estimated costs of disposition at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of cost or estimated fair value less costs of disposition. The net operating
results from OREO are recognized as non-interest expense. Premises and Equipment Premises and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets ranging from three to twelve years. Amortization of leasehold
improvements is calculated on the straight-line method over the shorter of the estimated useful
lives of the assets or the corresponding contractual lease term, which does not generally include
renewal options. Goodwill The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002. The adoption of SFAS No. 142 ceased the
amortization of goodwill and requires an annual assessment for impairment by applying a
fair-value-based test. In connection with acquisitions discussed in Note 2, the Company recognized
approximately $3.1 million of goodwill. In accordance with SFAS No. 142, the Company assesses the
goodwill for impairment on an annual basis, or on an interim basis if events or circumstances
indicate the fair value of the goodwill has decreased below its carrying value. As of December 31,
2004 and 2003, the Company evaluated its goodwill, and determined that no impairment was required. Income Taxes Provision for income taxes is the amount of estimated tax due reported on our
tax returns and the change in the amount of deferred tax assets and liabilities. Deferred income
taxes represent the estimated net income tax expense payable (or benefits receivable) for temporary
differences between the carrying amounts for financial reporting purposes and the amounts used for
tax purposes. Earnings Per Share Earnings per share (EPS) for all periods presented in the consolidated
statements of income are computed in accordance with the provisions
of SFAS No. 128 - Earnings Per
Share, and are based on the weighted-average number of shares outstanding during each year. Basic
EPS excludes dilution and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted EPS includes the
effect of common stock equivalents of the Company, which include only shares issuable on the
exercise of outstanding options. A reconciliation of the computation of Basic EPS and Diluted EPS
is presented in Note 17  Earnings Per Share. Stock-Based Compensation The Companys stock-based compensation plan is accounted for in
accordance with Accounting Principles Board (APB) Opinion
No. 25 - Accounting for Stock Issued
to Employees. Under APB Opinion No. 25, no compensation expense is recognized for a stock option
grant if the exercise price of the stock option at measurement date is equal to or greater than the
fair market value of the common stock on the date of grant. The Company applies SFAS No. 123 for
disclosure purposes only. SFAS No. 123 disclosures include pro forma net income and earning per
share as if the fair value-based method of accounting had been used. If compensation had been
determined based on SFAS No. 123, the Companys pro forma net income and pro forma per share data
would be as follows: For the Year EndedDecember 31,2004
    
    
    2003
    
    
    2002(in thousands, except per share data)Net income, as reported
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005Less: Stock-based employee
compensation expense determined
under the fair value method,
net of tax
    
    
    (775
    )
    
    
    (1,440
    )
    
    
    (1,076
    )Pro forma net income
    
    $
    29,850
    
    
    $
    28,194
    
    
    $
    18,929Earnings per share:Basic  as reported
    
    $
    5.04
    
    
    $
    4.91
    
    
    $
    3.35Basic  pro forma
    
    $
    4.91
    
    
    $
    4.68
    
    
    $
    3.17Diluted  as reported
    
    $
    4.75
    
    
    $
    4.55
    
    
    $
    3.16Diluted  pro forma
    
    $
    4.63
    
    
    $
    4.33
    
    
    $
    2.99
 Comprehensive Income Comprehensive income is displayed in the Consolidated Statements of
Changes in Shareholders Equity and Comprehensive Income and consists entirely of the change in net
unrealized holding gain or loss on securities classified as available for sale, net of the related
income tax effect. 47




---



##### Table of Contents



New Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No.
123. SFAS No. 123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach to accounting for share-based
payments in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values (i.e., pro forma disclosure is no longer an
alternative to financial statement recognition). SFAS No. 123(R) is effective for public companies
at the beginning of the first interim or annual period beginning after June 15, 2005. The Company
will transition to fair value based accounting for stock-based compensation using a modified
version of prospective application (modified prospective application). Under modified prospective
application, as it is applicable to the Company, SFAS 123(R) applies to new awards and to awards
modified, repurchased, or cancelled after July 1, 2005. Additionally, compensation cost for the
portion of awards for which the requisite service has not been rendered (generally referring to
non-vested awards) that are outstanding as of July 1, 2005 must be recognized as the remaining
requisite service is rendered during the period of and/or the periods after the adoption of SFAS
123(R). The attribution of compensation cost for those earlier awards will be based on the same
method and on the same grant-date fair values previously determined for the pro forma disclosures
required for companies that did not adopt the fair value accounting method for stock-based employee
compensation. Management is currently evaluating the effect of the
adoption of SFAS No. 123(R) and
can not currently quantify the impact, if any, on the Companys results of operations or financial
position. Future levels of compensation cost recognized related to stock-based compensation awards
may be impacted by new awards and/or modifications, repurchases and cancellations of existing
awards before and after the adoption of this standard. Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments provides guidance for determining when an investment is
considered impaired, whether impairment is other-than-temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment is less than its
cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the
ability and intent to hold an investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence
indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then
an impairment loss should be recognized equal to the difference between the investments cost and
its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company
began presenting the new disclosure requirements in its consolidated financial statements for the
year ended December 31, 2003. The recognition and measurement provisions were initially effective
for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004;
however, in September 2004, the effective date of these provisions was delayed until the
finalization of a FASB Staff Position to provide additional implementation guidance. In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, which addresses accounting for differences between the contractual cash flows of certain
loans and debt securities and the cash flows expected to be collected when loans or debt securities
are acquired in a transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in
pools or as part of a business combination and does not apply to originated loans. The application
of SOP 03-3 limits the interest income, including accretion of purchase price discounts that may be
recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess
of contractual cash flows over cash flows expected to be collected to be recognized as an
adjustment of yield, loss accrual or valuation allowance, such as the allowance for possible loan
losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial
investment be recognized prospectively through adjustment of the yield on the loan or debt security
over its remaining life. Decreases in expected cash flows should be recognized as impairment. In
the case of loans acquired in a business combination where the loans show signs of credit
deterioration, SOP 03-3 represents a significant change from current purchase accounting practice
whereby the acquirees allowance for loan losses is typically added to the acquirers allowance for
loan losses. SOP 03-3 is effective for loans and debt securities acquired by the Company beginning
January 1, 2005. The adoption of this new standard is not expected to have a material impact on the
Companys financial statements. In November 2002, FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions for FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 were adopted for all annual
periods ending after December 15, 2002. Implementation of the provisions of FIN 45 did not have a
material impact on the Companys financial statements. 48




---



##### Table of Contents



In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. FIN 46 establishes the criteria used to identify variable interest entities and
to determine whether or not to consolidate a variable interest entity. The Company adopted FIN 46
at December 31, 2003. In accordance therewith, the Company deconsolidated the Trusts. The result
was to recognize investments in the Trusts in other assets, and to report the amount of
subordinated debentures issued by the Company to the Trusts in the liability section of the
Companys consolidated balance sheet. In addition, beginning January 1, 2004, the Company
recognized the interest expense on the subordinated debentures in the consolidated statements of
income. Prior to FIN 46, the Company consolidated the Trusts and reported trust preferred
securities in the mezzanine section of the Companys consolidated balance sheets and recognized the
proportionate share of income attributable to the preferred shareholders as minority interest in
income of subsidiary in the consolidated statements of income. The adoption of FIN 46, as revised,
did not have a material impact on the results of operations or financial position, but affected net
interest income. As a result of the adoption of FIN 46 at December 31, 2003, financial information
prior to the adoption has not been restated. NOTE 2  ACQUISITIONS In February 2002, the Bank acquired Asahi Bank of California, a wholly-owned subsidiary of
Asahi Bank Ltd  Japan, for approximately $14.9 million. The acquisition was structured as a
statutory merger of Asahi Bank of California into the Bank. On the date of acquisition, Asahi Bank
of California had total assets of approximately $50.0 million, including $35.0 million of
commercial real estate and business loans and $15.0 million of cash and securities which were
acquired by the Bank at the closing of the transaction. The Bank recorded $2.3 million of goodwill
in connection with this acquisition. The purpose of this acquisition was to expand the Banks
customer base and to obtain certain commercial banking systems and technology. On October 25, 2002, the Company acquired the operating assets and the performing film finance
loan portfolio of the Lewis Horwitz Organization (LHO) in an all cash transaction valued at
approximately $93.0 million. The Bank recorded $0.8 million of goodwill in connection with this
acquisition. LHO is a lender to the independent film and television production industry. LHO
operates as a division of the Bank. The purpose of this acquisition was to diversify the Banks
lending products and expand its customer base. In 2004, LHO was newly branded Imperial Capital Bank
Entertainment Finance (ICBEF). These acquisitions were accounted for in accordance with SFAS No. 141. The results of
operations related to these entities are included in the consolidated statements of income from the
date of each respective acquisition. NOTE 3INVESTMENT SECURITIES The amortized cost and fair value of investment securities as of December 31, 2004 and 2003
are as follows: Amortized
    
    
    Fair
    
    
    Gross UnrealizedCost
    
    
    Value
    
    
    Gains
    
    
    Losses(in thousands)December 31, 2004:Investment securities available for sale:U.S. Government Agency
    
    $
    61,637
    
    
    $
    61,347
    
    
    $
    4
    
    
    $
    294Residual interest in securitized loans
    
    
    5,055
    
    
    
    5,368
    
    
    
    313
    
    
    
    Equity securities
    
    
    25
    
    
    
    130
    
    
    
    105
    
    
    
    Total investment securities available for sale
    
    $
    66,717
    
    
    $
    66,845
    
    
    $
    422
    
    
    $
    294Investment securities held-to-maturity:Mortgage-backed securities
    
    $
    296,028
    
    
    $
    295,226
    
    
    $
    161
    
    
    $
    963December 31, 2003:Investment securities available for sale:U.S. Government Agency
    
    $
    47,749
    
    
    $
    47,621
    
    
    $
    
    
    
    $
    128Residual interest in securitized loans
    
    
    5,055
    
    
    
    5,368
    
    
    
    313
    
    
    
    Equity securities
    
    
    25
    
    
    
    104
    
    
    
    88
    
    
    
    9Total investment securities available for sale
    
    $
    52,829
    
    
    $
    53,093
    
    
    $
    401
    
    
    $
    137
 At December 31, 2004, the carrying value of U.S. government agency securities available for
sale consisted of $52.2 million of securities that mature within three years with an average yield
of 2.79%, $5.4 million of securities that mature after three but within five years with an average
yield of 3.09%, and $4.0 million of securities that mature after five years but within ten years
with an average yield of 2.00%. 49




---



##### Table of Contents



At December 31, 2004, the remaining contractual maturity and weighted average life of the
mortgage-backed securities held-to-maturity was approximately 29.6 and 5.1 years, respectively. The
weighted average life of mortgage-backed securities differs from the contractual maturity due to
anticipated principal prepayments. At December 31, 2003, the carrying value of U.S. government agency securities available for
sale consisted of $21.0 million of securities that mature within three years with an average yield
of 2.61%, and $26.7 million of securities that mature after three but within five years with an
average yield of 3.15%. A total of 23 securities had unrealized losses at December 31, 2004. These securities, with
unrealized losses segregated by length of impairment, were as follows: Less than 12 months
    
    
    More than 12 months
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(in thousands)Investment securities available for saleU.S. Government Agency
    
    $
    39,787
    
    
    $
    294
    
    
    $
    
    
    
    $
    
    
    
    $
    39,787
    
    
    $
    294Investment securities held-to-maturityMortgage-backed securities
    
    $
    198,888
    
    
    $
    963
    
    
    $
    
    
    
    $
    
    
    
    $
    198,888
    
    
    $
    963
 Declines in the fair value of held-to-maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers, among other things, (i)
the length of time and the extent to which the fair value has been less than cost, (ii) the
financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Management has the ability and intent to hold the securities classified as held-to-maturity
until they mature, at which time the Company will receive full value for the securities.
Furthermore, as of December 31, 2004, management also had the ability and intent to hold the
securities classified as available for sale for a period of time sufficient for a recovery of cost.
The unrealized losses are largely due to increases in market interest rates over the yields
available at the time the underlying securities were purchased. The fair value is expected to
recover as the bonds approach their maturity date or repricing date or if market yields for such
investments decline. Management does not believe any of the securities are impaired due to reasons
of credit quality. Accordingly, as of December 31, 2004, management believes the impairments
detailed in the table above are temporary and no impairment loss has been realized in the Companys
consolidated statements of income. During 2004 and 2003, no securities were sold prior to their maturity or call date. There were no gross realized gains or losses on investment securities for the years ended
December 31, 2004, 2003 and 2002. NOTE 4LOANS Loans consisted of the following: December 31,2004
    
    
    2003(in thousands)Real estate loans
    
    $
    1,387,973
    
    
    $
    1,326,269Construction loans
    
    
    183,207
    
    
    
    129,540Film finance loans
    
    
    99,729
    
    
    
    98,630Franchise loans
    
    
    137,477
    
    
    
    102,128Commercial and other loans
    
    
    11,931
    
    
    
    6,8691,820,317
    
    
    
    1,533,896Unamortized premium
    
    
    6,346
    
    
    
    5,429Deferred loan origination fees and costs, net
    
    
    2,635
    
    
    
    (500
    )1,829,298
    
    
    
    1,538,825Allowance for loan losses
    
    
    (35,483
    )
    
    
    (33,401
    )$
    1,793,815
    
    
    $
    1,505,424
 At December 31, 2004, approximately 88.0%, 11.8% and 0.2% of the Banks loans collateralized
by real estate were secured by income producing properties, properties under development and
residential one-to-four family properties, respectively. At December 31, 2004, approximately 65.4%
of our loans secured by real estate were collateralized by properties located in California. 50




---



##### Table of Contents



At December 31, 2003, approximately 89.9%, 9.9% and 0.2% of the Banks loans collateralized by
real estate were secured by income producing properties, properties under development and
residential one-to-four family properties, respectively. At December 31, 2003, approximately 72.7%
of our loans secured by real estate were collateralized by properties located in California. At December 31, 2004 and 2003, approximately $932.5 million and $791.8 million, respectively,
of loans were pledged to secure a borrowing facility at the Federal Home Loan Bank (FHLB) of San
Francisco. The following is the activity in the allowance for loan losses on loans for the periods
indicated. As of and for the YearsEnded December 31,2004
    
    
    2003
    
    
    2002(in thousands)Balance at beginning of year
    
    $
    33,401
    
    
    $
    33,009
    
    
    $
    26,650Provision for loan losses
    
    
    4,725
    
    
    
    7,760
    
    
    
    9,030Additions related to acquisitions
    
    
    
    
    
    
    
    
    
    
    2,048Charge-offs:Real estate loans
    
    
    (189
    )
    
    
    (5,286
    )
    
    
    (4,730
    )Film finance loans
    
    
    (2,180
    )
    
    
    (800
    )
    
    
    Franchise loans
    
    
    
    
    
    
    (661
    )
    
    
    Commercial and other loans
    
    
    (1,121
    )
    
    
    (700
    )
    
    
    Total charge-offs
    
    
    (3,490
    )
    
    
    (7,447
    )
    
    
    (4,730
    )Recoveries:Real estate loans
    
    
    89
    
    
    
    14
    
    
    
    11Consumer loans
    
    
    758
    
    
    
    65
    
    
    
    Total recoveries
    
    
    847
    
    
    
    79
    
    
    
    11Net charge-offs
    
    
    (2,643
    )
    
    
    (7,368
    )
    
    
    (4,719
    )Balance at end of year
    
    $
    35,483
    
    
    $
    33,401
    
    
    $
    33,009
 As of December 31, 2004 and 2003, there were $200,000 and $800,000, respectively, of film
finance loan charge-offs related to borrowers domiciled outside of the United States. As of December 31, 2004 and 2003, the accrual of income had been suspended on approximately
$14.7 million and $8.5 million, respectively, of loans. Interest income that was contractually due
on loans that were on nonaccrual status that was not recognized during the years ended December 31,
2004, 2003 and 2002 was approximately $784,000, $608,000, and $941,000, respectively. As of December 31, 2004 and 2003, restructured loans totaled $11.8 million and $8.4 million,
respectively. There were no related commitments to lend additional funds on restructured loans. For
the years ended December 31, 2004, 2003 and 2002, $1.1 million, $775,000, and $905,000,
respectively, of gross interest income would have been recorded had the loans been current in
accordance with their original terms compared to $734,000, $696,000, and $796,000, respectively, of
interest income that was included in net income for the same periods. The average yield on
restructured loans was 7.47% and 6.93%, respectively, at December 31, 2004 and 2003. The Banks recorded investment in impaired loans, and the related valuation allowance, was as
follows: December 31, 2004
    
    
    December 31, 2003Recorded
    
    
    Valuation
    
    
    Recorded
    
    
    ValuationInvestment
    
    
    Allowance
    
    
    Investment
    
    
    Allowance(in thousands)Valuation allowance required
    
    $
    7,904
    
    
    $
    716
    
    
    $
    6,255
    
    
    $
    1,242No valuation allowance required
    
    
    10,726
    
    
    
    
    
    
    
    6,830
    
    
    
    Total impaired loans
    
    $
    18,630
    
    
    $
    716
    
    
    $
    13,085
    
    
    $
    1,242
 At December 31, 2004, $2.1 million of the impaired loans with a valuation allowance were on
nonaccrual status. The average recorded investment in impaired loans for the years ended December
31, 2004, 2003 and 2002 was $19.5 million, $13.1 million, and $11.6 million, respectively. Interest
income recognized on impaired loans for the years ended December 31, 2004, 2003 and 2002 was
$430,000, $475,000, and $375,000, respectively. Loans having carrying values of $1.9 million and $9.6 million were transferred to OREO in 2004
and 2003, respectively. 51




---



##### Table of Contents



The following is a summary of the CMOs related to the real estate loans held at Imperial
Capital REIT: Interest RateRecorded Amount
    
    
    Margin over 6 monthClass
    
    December 31,
    
    
    LIBOR
    
    
    Rating2004
    
    
    2003(in thousands)S
    
    $
    
    
    
    $
    190
    
    
    zero coupon
    
    
    AAAB
    
    
    
    
    
    
    1,146
    
    
    
    0.88%
    
    
    
    AAC
    
    
    
    
    
    
    14,539
    
    
    
    1.55%
    
    
    
    A
    
    
    
    15,875Unamortized Discount
    
    
    
    
    
    
    (7
    )$
    
    
    
    $
    15,868
 The interest rate on the variable rate CMOs adjusts monthly and the repayment of the bonds is
based on the cash flows of the underlying loan portfolio. During 2004, the remaining balance of the
CMOs was retired. NOTE 5OTHER REAL ESTATE OWNED Other real estate owned was stated as follows: December 31,2004
    
    
    2003(in thousands)Other real estate owned held for sale
    
    $
    
    
    
    $
    7,548Less: valuation allowance
    
    
    
    
    
    
    (500
    )Other real estate owned, net
    
    $
    
    
    
    $
    7,048
 The activity in the valuation allowance for other real estate owned was as follows: As of and for the YearsEnded December 31,2004
    
    
    2003
    
    
    2002(in thousands)Balance at beginning of year
    
    $
    500
    
    
    $
    493
    
    
    $
    374Provision for losses on other real estate owned
    
    
    1,000
    
    
    
    870
    
    
    
    796Charge-offs on other real estate owned
    
    
    (1,500
    )
    
    
    (863
    )
    
    
    (677
    )Balance at end of year
    
    $
    
    
    
    $
    500
    
    
    $
    493
 NOTE 6PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization and
consist of the following: December 31,2004
    
    
    2003(in thousands)Furniture, fixtures and equipment
    
    $
    11,606
    
    
    $
    9,542Leasehold improvements
    
    
    6,016
    
    
    
    5,351Automobiles
    
    
    1,028
    
    
    
    84218,650
    
    
    
    15,735Accumulated depreciation and amortization
    
    
    (12,005
    )
    
    
    (9,969
    )$
    6,645
    
    
    $
    5,766
 Depreciation and amortization expense on premises and equipment for the years ended December
31, 2004, 2003 and 2002 was $2.1 million, $1.7 million, and $946,000, respectively. 52




---



##### Table of Contents



NOTE 7DEPOSIT ACCOUNTS Deposit accounts consist of the following: December 31,2004
    
    
    2003(in thousands)Non-interest demand accounts
    
    $
    13,108
    
    
    $
    9,074Interest demand accounts
    
    
    72,832
    
    
    
    38,518Money market and passbook accounts
    
    
    172,092
    
    
    
    156,505Time certificates under $100,000
    
    
    703,493
    
    
    
    564,207Time certificates $100,000 and over
    
    
    470,507
    
    
    
    378,713$
    1,432,032
    
    
    $
    1,147,017
 Demand deposit accounts have no contractual maturity. Interest bearing demand accounts paid
interest at rates ranging from 1.60% to 2.25% per annum in 2004. The weighted average contractual
interest rate of the Banks interest-bearing demand deposit accounts was 2.13% and 1.86% at
December 31, 2004 and 2003, respectively. Money market and passbook accounts have no contractual
maturity and paid interest at rates ranging from 1.57% to 2.31% per annum in 2004. The weighted
average contractual interest rate of the Banks money market and passbook accounts was 2.31% and
1.63% at December 31, 2004 and 2003, respectively. Additionally, some money market accounts have
limited checking features which allow three check withdrawals per month. Time certificates have
maturities ranging from 3 months to five years and bear interest at varying rates based on market
conditions, ranging from 2.21% to 2.63% per annum in 2004. The weighted average contractual
interest rate of the Banks time certificate accounts was 2.63% and 2.24% at December 31, 2004 and
2003, respectively. Interest expense on time certificates $100,000 and over for the years ended December 31, 2004,
2003 and 2002 amounted to approximately $10.0 million, $8.7 million, and $9.0 million,
respectively. The Bank is a member of the FDIC and its deposits are insured up to $100,000 each per insured
depositor. As of December 31, 2004, the contractual maturities of time certificate accounts were as
follows: Year of Maturity
    
    Amount(in thousands)2005
    
    $
    988,9282006
    
    
    114,3612007
    
    
    47,3352008
    
    
    18,1382009
    
    
    5,238$
    1,174,000
 NOTE 8  LINES OF CREDIT As of December 31, 2004 and 2003, the Bank had uncommitted, unsecured lines of credit with two
unaffiliated financial institutions renewable daily in the amount of $30.0 million. There were no
borrowings against these lines during the years ended December 31, 2004 and 2003. The Company also has a $25.0 million revolving credit facility with an unaffiliated financial
institution. The facility matures on April 30, 2005. There were no borrowings against this line of
credit during the year ended December 31, 2004. 53




---



##### Table of Contents



NOTE 9  JUNIOR SUBORDINATED DEBENTURES The Company has created five trusts, Trust I, Trust II, Trust III, Trust IV, and Trust V.
Trust I issued $14.0 million of 10.60% cumulative trust preferred securities in September 2000,
Trust II issued $15.0 million of 10.20% cumulative trust preferred securities in February 2001,
Trust III issued $20.0 million of variable rate cumulative trust preferred securities in October
2002, Trust IV issued $10.0 million of variable rate cumulative trust preferred securities in
December 2002, and Trust V issued $25.0 million of variable rate cumulative trust preferred
securities in December 2002 (referred to collectively as the Trust Preferred securities). ITLA
Capital has fully and unconditionally guaranteed the Trust Preferred securities along with all
obligations of each trust under their respective trust agreements. Each trust was formed for the
exclusive purpose of issuing their respective Trust Preferred securities and common securities and
using the proceeds to acquire ITLA Capitals junior subordinated deferrable interest debentures.
Trust I acquired an aggregate principal amount of $14.4 million of ITLA Capitals 10.60% junior
subordinated deferrable interest debentures due September 7, 2030 that pay interest each March 7
and September 7 during the term of this security. Trust II acquired an aggregate principal amount
of $15.5 million of ITLA Capitals 10.20% junior subordinated deferrable interest debentures due
February 22, 2031 that pays interest each February 22 and August 22 during the term of this
security. Trust III acquired an aggregate principal amount of $20.6 million of ITLA Capitals
variable rate junior subordinated deferrable interest debentures due October 30, 2032 that pays
interest on each April 30 and October 30 during the term of the security. Trust IV acquired an
aggregate principal amount of $10.3 million of ITLA Capitals variable rate junior subordinated
deferrable interest debentures due December 10, 2032 that pays interest each June 15 and December
15 during the term of the security. Trust V acquired an aggregate principal amount of $25.8 million
of ITLA Capitals variable rate junior subordinated deferrable interest debentures due December 26,
2032 that pays interest quarterly on March 26, June 26, September 26, and December 26 during the
term of the security. The sole assets of each trust are the debentures it holds. Each of the
debentures is redeemable, in whole or in part, at ITLA Capitals option on or after ten years after
issuance for Trust I and Trust II (at declining premiums during the 11th through the 20th year
after issuance and at par during the 21st year and thereafter until maturity), and five years after
issuance for Trust III, Trust IV, and Trust V (at par until maturity). Each of the debentures is
also redeemable, in whole and not in part, at ITLA Capitals option any time prior to maturity,
upon the occurrence of certain special events, which include, among others, a determination by the
Federal Reserve Board that the Trust Preferred securities do not qualify as Tier 1 capital
(discussed below). The Company used the proceeds from the debentures for general corporate purposes, including an
aggregate of $81.3 million in capital contributions to the Bank to support future growth. The costs
associated with the Trust Preferred securities issuance were netted with proceeds and are being
amortized using a method that approximates the interest method over a period of five to ten years. Prior to the adoption of FIN 46, the Trust Preferred securities were reflected on the
Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in the Companys Junior
Subordinated Deferrable Interest Debentures and distributions paid on the Trust Preferred

securities were reflected as Minority interest in income of subsidiary in the Consolidated
Statements of Income. The recorded balance of Trust Preferred securities was $81.6 million at
December 31, 2002. Minority interest in income of subsidiary was $6.1 million, and $3.5 million for
the years ended December 31, 2003 and 2002, respectively. At December 31, 2003, upon adoption of
FIN 46, the Company was required to deconsolidate the Trusts from its financial statements. As a
result of the deconsolidation, the debentures are included in Junior subordinated debentures and
the Companys investment interests in the Trusts and deferred debt issuance costs are included in
Other assets on the Consolidated Balance Sheets at December 31, 2004. In addition, beginning
January 1, 2004, the Company is recognizing the interest expense on the subordinated debentures.
For the year ended December 31, 2004, interest expense incurred in connection with subordinated
debentures was $6.2 million. The trust preferred securities qualify as Tier 1 capital for ITLA Capital to the extent
permitted under Federal Reserve Board regulations. See Note 16  Regulatory Requirements. NOTE 10  FHLB ADVANCES AND OTHER BORROWINGS FHLB advances represent $492.4 million of collateralized obligations with the FHLB of San
Francisco. Other borrowings consist of $91.8 million of securities sold under agreements to
repurchase, which mature within one to three years. FHLB Advances and other borrowings are
summarized by contractual maturity as follows: Year of Maturity
    
    Amount(in thousands)2005
    
    $
    265,3002006
    
    
    143,9342007
    
    
    145,9842008
    
    
    13,3892009
    
    
    15,617$
    584,224
 54




---



##### Table of Contents



The Company has pledged real estate loans with a carrying value of $932.5 million to secure
FHLB Advances and investment securities held-to-maturity with a carrying and fair value of $296.0
million and $295.2 million, respectively, to secure securities sold under agreements to repurchase.
The total FHLB borrowing capacity available from the collateral that has been pledged is
approximately $788.6 million, of which $193.7 million remained available to borrow as of December
31, 2004. The following table represents a summary of short and long-term borrowings for the periods
indicated: December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Short-Term Borrowings:Maximum amount outstanding at any month-end
during the year
    
    $
    199,000
    
    
    $
    251,000
    
    
    $
    187,000Weighted-average daily balance outstanding
    
    $
    91,316
    
    
    $
    54,388
    
    
    $
    70,964Weighted-average rate paid during the year
    
    
    1.53
    %
    
    
    1.13
    %
    
    
    1.83
    %Weighted-average rate on balance at year-end
    
    
    2.37
    %
    
    
    1.01
    %
    
    
    1.23
    %Balance at year-end
    
    $
    166,000
    
    
    $
    251,000
    
    
    $
    187,000Interest expense
    
    $
    1,664
    
    
    $
    753
    

    
    $
    1,274Long-Term Borrowings:Maximum amount outstanding at any month-end
during the year
    
    $
    418,224
    
    
    $
    165,985
    
    
    $
    269,685Weighted-average daily balance outstanding
    
    $
    170,906
    
    
    $
    146,009
    
    
    $
    124,323Weighted-average rate paid during the year
    
    
    3.28
    %
    
    
    3.03
    %
    
    
    3.54
    %Weighted-average rate on balance at year-end
    
    
    3.16
    %
    
    
    3.23
    %
    
    
    2.92
    %Balance at year-end
    
    $
    418,224
    
    
    $
    111,135
    
    
    $
    151,685Interest expense
    
    $
    5,608
    
    
    $
    4,422
    
    
    $
    4,398
 NOTE 11  RESIDUAL INTEREST IN SECURITIZED LOANS During the first quarter of 2002, the Company formed a qualified special purpose entity
(QSPE) to issue $86.3 million of asset-backed notes in a securitization of substantially all of
the Companys residential loan portfolio. The Company recognized a gain of $3.7 million on the
securitization of these loans, which was included in other non-interest income within the
consolidated statement of income. Concurrent with recognizing the sale, the Company recorded a
residual interest of $5.6 million, which represented the present value of future cash flows (spread
and fees) that are estimated to be received over the life of the loans. The residual interest is
recorded on the consolidated balance sheet in Investment securities available for sale, at fair
value. The value of the residual interest is subject to substantial credit, prepayment, and
interest rate risk on the sold residential loans. The residual interest is classified as
available for sale and, as such, recorded at fair value with the resulting changes in fair value
recorded as accumulated unrealized gain or loss in a separate component of shareholders equity
until realized. Fair value is estimated on a monthly basis using a discounted cash flow analysis.
These cash flows are estimated over the lives of the receivables using prepayment, default, and
interest rate assumptions that management believes market participants would use for similar
financial instruments. During 2004 and 2003, the Company recognized an other than temporary impairment of $1.0
million each year on the residual interest. Impairments that are deemed to be other than temporary
are charged to non-interest income. In evaluating impairments as other than temporary the Company
considers credit risk, as well as the magnitude and trend of default rates and prepayment speeds of
the underlying residential loans . 55




---



##### Table of Contents



At December 31, 2004 and 2003, key economic assumptions and the sensitivity of the
current fair value of the residual interest based on projected cash flows to immediate adverse
changes in those assumptions are as follows: Dollars in thousands
    
    December 31, 2004
    
    
    December 31, 2003Fair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.68
    
    
    
    0.90Weighted average life (in years)  residual interest
    
    
    3.61
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    26.5
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (236
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (630
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (243
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (630
    )
    
    $
    (367
    )Weighted average lifetime credit losses
    
    
    25.0
    %
    
    
    25.0
    %Impact of 10% adverse change
    
    $
    (262
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (700
    )
    
    $
    (753
    )
 These sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in the fair value of the residual interest are based on a variation in
assumptions and generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in the above table, the effect of
a variation in a particular assumption on the fair value of the residual interest is calculated
without changing any other assumption; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in lower prepayments but
increased credit losses), which might magnify or counteract the sensitivities, and depending on the
severity of such changes, the results of operations may be materially affected. NOTE 12  BENEFIT PLANS Salary Savings Plan. The Company has a salary savings plan (the Savings Plan) that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings Plan, participating employees may contribute a portion of their pretax earnings, not to
exceed the annual limits established by the Internal Revenue Service. We match 50% of each
employees salary deferral, up to a maximum 6% of the employees salary. Employees vest in employer
contributions and the earnings thereon over a five-year period. Matching contributions to the
Savings Plan were $458,000, $357,000, and $189,000 in 2004, 2003 and 2002, respectively. Nonqualified Deferred Compensation Plans. The Company has deferred compensation plans designed
to provide additional retirement benefits for certain officers and key employees who cannot take
full advantage of the Savings Plan. There were no costs associated with these deferred compensation
plans in 2004, 2003 and 2002. Long-Term Supplemental Executive Retirement Plan. The Company has adopted a Long-Term
Supplemental Executive Retirement Plan (the SERP) for certain officers and key employees which
provides for participants to be awarded shares of common stock of the Company on a tax deferred
basis from the current Recognition and Retention Plan (RRP) previously approved by the
shareholders. Such shares vest in three-year cycles or earlier at the discretion of the
Compensation Committee of the Board of Directors, and once vested, may be distributed to
participants upon a change in control or the participants death, disability, retirement date or
date of termination of employment. During 1998, the Company issued shares of common stock,
representing the remaining number of unissued shares authorized to be awarded under the RRP, to a
Rabbi Trust managed by a third-party financial institution. For 2004, 2003 and 2002, 23,198, 21,158
and 20,880 shares, respectively, were allocated to designated SERP accounts for the future benefit
of certain Company executives. The Company recognized $144,000, $189,000, and $476,000 of
compensation expense from the SERP/RRP in 2004, 2003 and 2002, respectively. Stock Plans. The Company adopted an employee stock incentive plan and stock option plan for
nonemployee directors (collectively, the Stock Plan) which provides for the award of up to
1,311,500 shares of common stock to officers, directors and employees as compensation for future
services, not to exceed a combined 550,000 shares during 1995, the first year of the Stock Plan,
with annual awards thereafter limited to 100,000 additional shares. An amendment to the Stock Plan
increasing the number of shares authorized for award under the Stock Plan by 311,500 shares was
approved by the Companys shareholders on June 29, 2001. As of December 31, 2004, the Company has
granted an aggregate of 1,568,250 options under the Stock Plan, of which 583,894 have been
exercised and 392,017 have been forfeited. The exercise price per share of the options granted
ranges from $10.00 to $48.26 per share and generally vest 33-1/3% per year, beginning with the
first anniversary of the date of each individual grant. 56




---



##### Table of Contents



The number of options and weighted-average exercise prices of options for each of the
following groups of options, for the periods indicated, are as follows: Weighted-AverageNumber of Options
    
    
    Exercise Price2004
    
    
    2003
    
    
    2004
    
    
    2003Options outstanding at the beginning of the year
    
    
    852,783
    
    
    
    1,067,000
    
    
    $
    18.35
    
    
    $
    16.86Options granted during the year
    
    
    13,500
    
    
    
    24,000
    
    
    $
    40.27
    
    
    $
    38.37Options exercised during the year
    
    
    (256,600
    )
    
    
    (220,880
    )
    
    $
    16.21
    
    
    $
    13.12Options forfeited during the year
    
    
    (17,344
    )
    
    
    (17,337
    )
    
    $
    30.94
    
    
    $
    24.92Options outstanding at the end of the year
    
    
    592,339
    
    
    
    852,783
    
    
    $
    19.41
    
    
    $
    18.35Options exercisable at the end of the year
    
    
    507,070
    
    
    
    638,238
    
    
    $
    17.53
    
    
    $
    15.17
 The fair value of each option grant was estimated on the date of grant using an option pricing
model with the following weighted-average assumptions for option grants: Weighted-Average Assumptions for OptionGrants2004
    
    
    2003
    
    
    2002Dividend Yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected Volatility
    
    
    36.17
    %
    
    
    36.36
    %
    
    
    31.36
    %Risk-Free Interest Rates
    
    
    4.12
    %
    
    
    4.05
    %
    
    
    4.74
    %Expected Lives
    
    Seven Years
    
    Seven Years
    
    Seven YearsWeighted-Average Fair Value
    
    $
    18.44
    
    
    $
    17.66
    
    
    $
    11.93
 NOTE 13  INCOME TAXES Deferred income taxes reflect the net effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of our deferred tax assets and liabilities are as follows: December 31,2004
    
    
    2003(in thousands)Components of the deferred tax asset:Allowance for loan losses
    
    $
    14,487
    
    
    $
    13,339Accrued expenses
    
    
    2,555
    
    
    
    2,103State income taxes
    
    
    1,230
    
    
    
    1,262Other real estate owned
    
    
    
    
    
    
    460Other
    
    
    20
    
    
    
    278Total deferred tax assets
    
    
    18,292
    
    
    
    17,442Components of the deferred tax liability:Deferred loan origination costs
    
    
    5,447
    
    
    
    3,723FHLB stock dividends
    
    
    2,323
    
    
    
    1,999Unrealized gain on investment securities available for sale
    
    
    54
    
    
    
    111Total deferred tax liabilities
    
    
    7,824
    
    
    
    5,833Net deferred tax asset
    
    $
    10,468
    
    
    $
    11,609
 57




---



##### Table of Contents



The deferred tax asset is considered fully realizable, as when the temporary differences
associated with the deferred tax asset are recognized for income tax purposes, those deductions are
expected to be fully offset, either by carryback against previously taxed income or by reducing
future taxable income. Accordingly, we have not established a valuation allowance on the deferred
tax asset. A summary of the provision for income taxes follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Current provision:Federal
    
    $
    13,945
    
    
    $
    13,131
    
    
    $
    11,127State
    
    
    4,805
    
    
    
    3,416
    
    
    
    3,91618,750
    
    
    
    16,547
    
    
    
    15,043Deferred provision (benefit):Federal
    
    
    902
    
    
    
    1,835
    
    
    
    (462
    )State
    
    
    296
    
    
    
    564
    
    
    
    (1,793
    )1,198
    
    
    
    2,399
    
    
    
    (2,255
    )$
    19,948
    
    
    $
    18,946
    
    
    $
    12,788
 A reconciliation of the federal statutory income tax rate to the effective income tax rate is as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Federal statutory income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal income
tax benefit
    
    
    7.0
    %
    
    
    7.0
    %
    
    
    7.0
    %State income tax credit and other benefits

    
    
    (2.6
    )%
    
    
    (3.0
    )%
    
    
    (3.0
    )%Effective income tax rate
    
    
    39.4
    %
    
    
    39.0
    %
    
    
    39.0
    %
 The income tax benefit (expense) component of other comprehensive income was $57,000,
$186,000, and $(302,000) for the years ended December 31, 2004, 2003 and 2002, respectively.
During 2004, the Company recognized a $3.3 million income tax benefit related to the exercise of
employee stock options. The benefit was recorded in contributed capital within the consolidated
balance sheets. No income tax benefits related to the exercise of
employee stock options were recorded in December 31, 2003 and 2002. NOTE 14  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK We are a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments consist of
commitments to extend credit. These instruments may involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet. The contractual
amounts of those instruments reflect the extent of involvement we have in particular classes of
financial instruments. We have exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit. This exposure is represented by the
contractual amount of those instruments and the Company uses the same lending policies for these
instruments as it does for the loan portfolio. We had outstanding unfunded loan commitments,
consisting primarily of the unfunded portion of construction and film finance loans, of
approximately $248.0 million and $153.5 million at December 31, 2004 and 2003 respectively. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft
protection agreements are commitments for possible extensions of future extensions of credit to
existing customers. These lines of credit are typically uncollateralized and usually do not
contain a specific maturity date and may not be drawn upon to the total extent to which the Company
is committed. We had outstanding commercial lines of credit totaling $1.3 million and $66.1
million at December 31, 2004 and 2003, respectively. 58




---



##### Table of Contents



NOTE 15  COMMITMENTS AND CONTINGENCIES Commitments We lease office facilities under noncancelable operating leases. Estimated future minimum
lease payments required under leases with initial or remaining noncancelable terms in excess of one
year at December 31, 2004 are as follows: (in thousands)2005
    
    $
    3,2302006
    
    
    2,6452007
    
    
    1,5962008
    
    
    9792009
    
    
    350Thereafter
    
    
    90Sub-Lease income
    
    
    (766
    )$
    8,124
 Certain leases contain rental escalation clauses based on increases in the consumer price
index, and renewal options of up to ten years, which may be exercised by the Company. We incurred
rent expense of $3.6 million, $2.9 million, and $2.1 million in 2004, 2003 and 2002, respectively. Contingencies We are subject to various pending legal actions which arise in the normal course of business.
We maintain reserves for losses from legal actions which are both probable and estimable. Although
the amount of the ultimate exposure, if any, cannot be determined at this time, in managements
opinion, based upon advice of counsel, the disposition of claims currently pending are not expected
to have a material adverse effect on our financial condition or results of operations. NOTE 16  REGULATORY REQUIREMENTS The Company, the Banks holding company, is subject to supervision by the Federal Reserve
Board (FRB). The Bank is subject to supervision and regulation by the FDIC and the Department of
Financial Institutions (DFI) of the State of California under the provisions of the California
Banking Law. These provisions authorize the Banks issuance of deposits, place limits on the size
of loans the Bank can make, and specify the maintenance of minimum liquidity levels. The Company and the Bank are also subject to various capital requirements administered by the
FRB and FDIC, respectively. The FRB and the FDIC have substantially similar risk-based capital
ratio and leverage ratio guidelines for banking organizations. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary action by
regulators that, if undertaken, could have a direct material effect on the Companys consolidated
financial statements and the Banks operations. Under the applicable capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Companys and the Banks
assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Companys and the Banks capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and
Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average total assets (Leverage
Ratio). Management believes, as of December 31, 2004 and 2003, that the Company and the Bank meet
all applicable capital adequacy requirements. On March 1, 2005, the FRB adopted a final rule that allows the continued inclusion of trust
preferred securities in the tier 1 capital of bank holding companies. The final rule limits
restricted core capital elements (which include trust preferred securities) to 25 percent of all
core capital elements, net of goodwill less any associated deferred tax liability. Amounts of
restricted core capital elements in excess of these limits generally may be included in tier 2
capital. The final rule provides a five year transition period, ending March 31, 2009, for
application of the quantitative limits. Had the Company applied this final rule to the regulatory
capital calculations below, the Company would still meet all capital adequacy requirements to which
it is subject. 59




---



##### Table of Contents



As of December 31, 2004, the most recent notification from the FDIC categorized the Bank as
well capitalized under the applicable regulatory framework. Similarly, the Companys capital
levels exceeded the levels necessary to be considered well capitalized. To be categorized as
well capitalized, the Company and the Bank must maintain minimum Total Risk-Based, Tier 1
Risk-Based and Tier 1 Leverage Ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have changed the Companys and the
Banks category. ITLA Capital and the Banks actual regulatory capital amounts and ratios are presented in the
following table: Capital RequiredMinimum Requirement
    
    
    to Maintainfor Capital Adequacy
    
    
    Well CapitalizedActual
    
    
    Purposes
    
    
    DesignationAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(dollars in thousands)As of December 31, 2004Total capital (to
risk-weighted assets)ITLA Capital
    
    $
    299,037
    
    
    
    16.0
    %
    
    $
    149,498
    
    
    
    8.0
    %
    
    $
    186,873
    
    
    
    10.0
    %Imperial Capital Bank
    
    $
    245,018
    
    
    
    13.5
    %
    
    $
    145,533
    
    
    
    8.0
    %
    
    $
    181,916
    
    
    
    10.0
    %Tier I capital (to
risk-weighted assets)ITLA Capital
    
    $
    255,371
    
    
    
    13.7
    %
    
    $
    74,750
    
    
    
    4.0
    %
    
    $
    112,125
    
    
    
    6.0
    %Imperial Capital Bank
    
    $
    222,134
    
    
    
    12.2
    %
    
    $
    72,767
    
    
    
    4.0
    %
    
    $
    109,151
    
    
    
    6.0
    %Tier I capital (to average
total assets)ITLA Capital
    
    $
    255,371
    
    
    
    12.3
    %
    
    $
    83,274
    
    
    
    4.0
    %
    
    $
    104,093
    
    
    
    5.0
    %Imperial Capital Bank
    
    $
    222,134
    
    
    
    11.0
    %
    
    $
    80,729
    
    
    
    4.0
    %
    
    $
    100,911
    
    
    
    5.0
    %As of December 31, 2003Total capital (to
risk-weighted assets)ITLA Capital
    
    $
    284,952
    
    
    
    18.2
    %
    
    $
    125,444
    
    
    
    8.0
    %
    
    $
    156,805
    
    
    
    10.0
    %Imperial Capital Bank
    
    $
    233,746
    
    
    
    15.6
    %
    
    $
    120,170
    
    
    
    8.0
    %
    
    $
    150,213
    
    
    
    10.0
    %Tier I capital (to
risk-weighted assets)ITLA Capital
    
    $
    244,745
    
    
    
    15.6
    %
    
    $
    62,722
    
    
    
    4.0
    %
    
    $
    94,083
    
    
    
    6.0
    %Imperial Capital Bank
    
    $
    214,813
    
    
    
    14.3
    %
    
    $
    60,085
    
    
    
    4.0
    %
    
    $
    90,128
    
    
    
    6.0
    %Tier I capital (to average
total assets)ITLA Capital
    
    $
    244,745
    
    
    
    14.2
    %
    
    $
    69,081
    
    
    
    4.0
    %
    
    $
    86,351
    
    
    
    5.0
    %Imperial Capital Bank
    
    $
    214,813
    
    
    
    13.2
    %
    
    $
    64,964
    
    
    
    4.0
    %
    
    $
    81,205
    
    
    
    5.0
    %
 Additionally, Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of dividends which may
be paid at any date is generally limited to the retained earnings of the Bank, and loans or
advances are limited to 10 percent of the Banks capital stock and surplus on a secured basis. At December 31, 2004, the Banks retained earnings available for the payment of dividends was
$91.0 million. Accordingly, $134.0 million of the Companys equity in the net assets of the Bank
was restricted at December 31, 2004. Funds available for loans or advances by the Bank to the
Company amounted to $13.4 million. In addition, dividends paid by the Bank to the Company would be
prohibited if the effect thereof would cause the Banks capital to be reduced below applicable
minimum capital requirements. 60




---



##### Table of Contents



NOTE 17EARNINGS PER SHARE The following is a reconciliation of the amounts used in the calculation of Basic earnings per
share and Diluted earnings per share. Weighted-AverageShares
    
    
    Per ShareNet Income
    
    
    Outstanding
    
    
    Amount(in thousands, except per share data)Year ended December 31, 2004Basic earnings per share
    
    $
    30,625
    
    
    
    6,077
    
    
    $
    5.04Dilutive effect of stock options
    
    
    
    
    
    
    377
    
    
    
    (0.29
    )Diluted earnings per share
    
    $
    30,625
    
    
    
    6,454
    
    
    $
    4.75Year ended December 31, 2003Basic earnings per share
    
    $
    29,634
    
    
    
    6,030
    
    
    $
    4.91Dilutive effect of stock options
    
    
    
    
    
    
    480
    
    
    
    (0.36
    )Diluted earnings per share
    
    $
    29,634
    
    
    
    6,510
    
    
    $
    4.55Year ended December 31, 2002Basic earnings per share
    
    $
    20,005
    
    
    
    5,979
    
    
    $
    3.35Dilutive effect of stock options
    
    
    
    
    
    
    360
    
    
    
    (0.19
    )Diluted earnings per share
    
    $
    20,005
    
    
    
    6,339
    
    
    $
    3.16
 NOTE 18DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are based on judgments regarding credit risk, expectations of future
economic conditions, normal cost of administration of these instruments and other risk
characteristics, including interest rate risk and prepayment risk. These estimates are subjective
in nature, involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates. The
fair value estimates presented do not include the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments. We use the following methods and assumptions to estimate the fair value of each class of
financial instruments for which it is practicable to estimate value: Cash and Cash Equivalents The carrying values reported in the balance sheet approximate fair
values due to the short-term nature of the assets. Investment Securities Fair values are based on bid prices and quotations published and/or
received from established securities dealers, except for the value of the residual interest which
is valued using present value of estimated future cash flows. Stock in Federal Home Loan Bank The carrying value approximates fair value based on the
redemption provisions of the FHLB. Loans The fair value is estimated using the present value of future cash flows, discounted
using the current rate at which similar loans would be made to borrowers with similar credit
ratings and for the same maturities and giving consideration to estimated prepayment risk and
credit risk. Accrued Interest Receivable The carrying values reported in the balance sheet approximate
the fair values due to the short-term nature of the asset. Deposit Accounts The fair value of demand deposit, money market and passbook accounts is
estimated to be the amount payable on demand due to the short-term nature of these deposits. The
fair values for time certificates, both over and under $100,000, are estimated by discounting the
expected cash flows at current market rates over expected maturities. Federal Home Loan Bank Advances and Other Borrowings The fair value is estimated by
discounting the expected cash flows at current market rates over contractual maturities. Junior Subordinated Debentures The fair value is estimated using the present value of future
cash flows, discounted using the current rate at which a similar debenture would be issued. 61




---



##### Table of Contents



The carrying amounts and estimated fair values of our financial instruments are as follows: December 31,2004
    
    
    2003Cost or
    
    
    
    
    
    
    Cost orCarrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(in thousands)Financial assets:Cash and cash equivalents
    
    $
    87,580
    
    
    $
    87,580
    
    
    $
    178,318
    
    
    $
    178,318Investment securities available for sale
    
    
    66,845
    
    
    
    66,845
    
    
    
    53,093
    
    
    
    53,093Investment securities held-to-maturity
    
    
    296,028
    
    
    
    295,226
    
    
    
    
    
    
    
    Stock in Federal Home Loan Bank
    
    
    23,200
    
    
    
    23,200
    
    
    
    17,966
    
    
    
    17,966Loans, net
    
    
    1,793,815
    
    
    
    1,825,972
    
    
    
    1,505,424
    
    
    
    1,516,174Accrued interest receivable
    
    
    10,695
    
    
    
    10,695
    
    
    
    8,958
    
    
    
    8,958Financial liabilities:Deposit accounts
    
    $
    1,432,032
    
    
    $
    1,423,301
    
    
    $
    1,147,017
    
    
    $
    1,144,019Federal Home Loan Bank advances and
other borrowings
    
    
    584,224
    
    
    
    575,360
    
    
    
    362,135
    
    
    
    361,783Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    15,868
    
    
    
    15,872Junior subordinated debentures
    
    
    86,600
    
    
    
    93,480
    
    
    
    86,600
    
    
    
    88,000
 NOTE 19BUSINESS SEGMENT INFORMATION SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information requires
disclosure of segment information in a manner consistent with the management approach. The
management approach is based on the way the chief operating decision-maker organizes segments
within a company for making operating decisions and assessing performance. The main factors used to identify operating segments were the specific product and business
lines of the various operating segments of the Company. Operating segments are organized separately
by product and service offered. We have identified one operating segment that meets the criteria of
being a reportable segment in accordance with the provisions of SFAS No. 131. This reportable
segment is the Companys lending operations, which by its legal form, is identified as operations
of the Bank and Imperial Capital REIT. This segment derives the majority of its revenue by
originating and purchasing loans. Other operating segments of the Company that did not meet the
criteria of being a reportable segment in accordance with SFAS No. 131 have been aggregated and
reported as All Other. Transactions from all of our operating segments occur primarily in the
United States. The Company has no transactions with a single external customer that exceeds ten
percent of the Companys consolidated revenues. Transactions between the reportable segment of the Company and its other operating segments
are made at terms which approximate arms-length transactions and in accordance with GAAP. There is
no significant difference between the measurement of the reportable segments assets and profits
and losses disclosed below and the measurement of assets and profits and losses in our consolidated
balance sheets and statements of income. Accounting allocations are made in the same manner for all
operating segments. 62




---



##### Table of Contents



Required reported segment information for 2004, 2003 and 2002 is detailed below: LendingOperations
    
    
    All Other
    
    
    Eliminations
    
    
    ConsolidatedAs of or for the Year Ended December 31, 2004Revenues from external customers
    
    $
    139,154
    
    
    $
    308
    
    
    $
    
    
    
    $
    139,462Total interest income
    
    
    124,788
    
    
    
    1,608
    
    
    
    (1,442
    )
    
    
    124,954Total interest expense
    
    
    36,528
    
    
    
    6,332
    
    
    
    (1,442
    )
    
    
    41,418Depreciation and amortization expense
    
    
    1,723
    
    
    
    362
    
    
    
    
    
    
    
    2,085Provision for income taxes
    
    
    22,836
    
    
    
    (2,888
    )
    
    
    
    
    
    
    19,948Capital expenditures
    
    
    2,752
    
    
    
    242
    
    
    
    
    
    
    
    2,994Total assets
    
    
    2,253,190
    
    
    
    327,763
    
    
    
    (262,882
    )
    
    
    2,318,071Income (loss) before provision for
income taxes
    
    
    59,537
    
    
    
    (8,964
    )
    
    
    
    
    
    
    50,573As of or for the Year Ended December 31, 2003Revenues from external customers
    
    $
    130,055
    
    
    $
    1,162
    
    
    $
    
    
    
    $
    131,217Total interest income
    
    
    115,452
    
    
    
    7,404
    
    
    
    (6,879
    )
    
    
    115,977Total interest expense
    
    
    31,546
    
    
    
    6,200
    
    
    
    (6,879
    )
    
    
    30,867Depreciation and amortization expense
    
    
    1,343
    
    
    
    379
    
    
    
    
    
    
    
    1,722Provision for income taxes
    
    
    20,627
    
    
    
    (1,681
    )
    
    
    
    
    
    
    18,946Capital expenditures
    
    
    2,787
    
    
    
    504
    
    
    
    
    
    
    
    3,291Total assets
    
    
    1,741,092
    
    
    
    350,013
    
    
    
    (272,890
    )
    
    
    1,818,215Income (loss) before provision for
income taxes
    
    
    56,472
    
    
    
    (7,892
    )
    
    
    
    
    
    
    48,580As of or for the Year Ended December 31, 2002Revenues from external customers
    
    $
    101,146
    
    
    $
    9,835
    
    
    $
    
    
    
    $
    110,981Total interest income
    
    
    104,652
    
    
    
    10,332
    
    
    
    (4,376
    )
    
    
    110,608Total interest expense
    
    
    35,694
    
    
    
    6,004
    
    
    
    (4,376
    )
    
    
    37,322Depreciation and amortization expense
    
    
    479
    
    
    
    467
    
    
    
    
    
    
    
    946Provision for income taxes
    
    
    11,542
    
    
    
    1,246
    
    
    
    
    
    
    
    12,788Capital expenditures
    
    
    2,612
    
    
    
    354
    
    
    
    
    
    
    
    2,966Total assets
    
    
    1,543,502
    
    
    
    511,759
    
    
    
    (333,296
    )
    
    
    1,721,965Income (loss) before provision for
income taxes
    
    
    36,069
    
    
    
    (3,276
    )
    
    
    
    
    
    
    32,793
 NOTE 20PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS The parent company only financial statements of ITLA Capital are as follows: Condensed Balance Sheets December 31,2004
    
    
    2003(in thousands)AssetsCash and cash equivalents
    
    $
    8,206
    
    
    $
    1,613Investment securities available for sale, at fair value
    
    
    5,499
    
    
    
    5,472Investments in wholly-owned subsidiaries:Imperial Capital Bank
    
    
    225,075
    
    
    
    217,891Imperial Capital Real Estate Investment Trust
    
    
    35,705
    
    
    
    36,099Other subsidiaries
    
    
    218
    
    
    
    253Investments in unconsolidated subsidiaries
    
    
    2,600
    
    
    
    2,600Other assets
    
    
    14,496
    
    
    
    16,606Total assets
    
    $
    291,799
    
    
    $
    280,534Liabilities and Shareholders EquityJunior subordinated debentures
    
    $
    86,600
    
    
    $
    86,600Other liabilities
    
    
    10,475
    
    
    
    7,035Shareholders equity
    
    
    194,724
    
    
    
    186,899Total liabilities and shareholders equity
    
    $
    291,799
    
    
    $
    280,534
 63




---



##### Table of Contents



Condensed Statements of Income Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Interest income
    
    $
    1,608
    
    
    $
    1,321
    
    
    $
    1,059Interest expense
    
    
    6,332
    
    
    
    6,200
    
    
    
    3,356Net interest expense
    
    
    (4,724
    )
    
    
    (4,879
    )
    
    
    (2,297
    )Provision for loan losses
    
    
    
    
    
    
    150
    
    
    
    5Non-interest expense:General and administrative expense
    
    
    2,883
    
    
    
    2,589
    
    
    
    2,367Other
    
    
    1,300
    
    
    
    180
    
    
    
    707Total non-interest expense
    
    
    4,183
    
    
    
    2,769
    
    
    
    3,074Loss before income tax (benefit) expense and
equity in net income of subsidiaries
    
    
    (8,907
    )
    
    
    (7,798
    )
    
    
    (5,376
    )Income tax (benefit) expense
    
    
    (2,866
    )
    
    
    (1,642
    )
    
    
    420Loss before equity in net income of subsidiaries
    
    
    (6,041
    )
    
    
    (6,156
    )
    
    
    (5,796
    )Equity in net income of subsidiaries
    
    
    36,666
    
    
    
    35,790
    
    
    
    25,801Net income
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005
 Condensed Statements of Cash Flows Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Cash Flows From Operating Activities:Net income
    
    $
    30,625
    
    
    $
    29,634
    
    
    $
    20,005Adjustments to net income:Equity in undistributed net income of subsidiaries
    
    
    (36,666
    )
    
    
    (35,790
    )
    
    
    (25,807
    )Provision for loan losses
    
    
    
    
    
    
    150
    
    
    
    5Other, net
    
    
    3,099
    
    
    
    506
    
    
    
    Decrease (increase) in other assets
    
    
    2,127
    
    
    
    (5,494
    )
    
    
    (4,887
    )Increase in liabilities
    
    
    3,440
    
    
    
    3,252
    
    
    
    5,423Net cash provided by (used in) operating activities
    
    
    2,625
    
    
    
    (7,742
    )
    
    
    (5,261
    )Cash Flows From Investing Activities:Proceeds from securitization and sale of real estate loans
    
    
    
    
    
    
    
    
    
    
    98,155Purchase of loans from Imperial Capital Bank
    
    
    
    
    
    
    
    
    
    
    (98,602
    )Purchases of investment securities available for sale
    
    
    
    
    
    
    
    
    
    
    (5,305
    )Capital contribution to Imperial Capital Bank
    
    
    
    
    
    
    
    
    
    
    (53,348
    )Cash paid for common equity of Trust Preferred Securities
    
    
    
    
    
    
    
    
    
    
    (1,691
    )Dividends received from Imperial Capital Bank
    
    
    28,000
    
    
    
    2,500
    
    
    
    9,000Dividends received from Imperial Capital REIT
    
    
    1,839
    
    
    
    4,236
    
    
    
    7,070Other, net
    
    
    316
    
    
    
    (383
    )
    
    
    (143
    )Net cash provided by (used in) investing activities
    
    
    30,155
    
    
    
    6,353
    
    
    
    (44,864
    )Cash Flows From Financing Activities:Proceeds from issuance of trust preferred securities
    
    
    
    
    
    
    
    
    
    
    53,389Proceeds from exercise of employee stock options
    
    
    4,159
    
    
    
    2,897
    
    
    
    184Cash paid to acquire treasury stock
    
    
    (30,346
    )
    
    
    (2,233
    )
    
    
    (2,343
    )Net cash (used in) provided by financing activities
    
    
    (26,187
    )
    
    
    664
    
    
    
    51,230Net increase (decrease) in cash and cash equivalents
    
    
    6,593
    
    
    
    (725
    )
    
    
    1,105Cash and cash equivalents at beginning of period
    
    
    1,613
    
    
    
    2,338
    
    
    
    1,233Cash and cash equivalents at end of period
    
    $
    8,206
    
    
    $
    1,613
    
    
    $
    2,338
 64




---



##### Table of Contents



Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Control and Procedures Evaluation of Disclosure Controls and Procedures An evaluation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the Act)) was carried out as of December 31,
2004 under the supervision and with the participation of the Companys Chief Executive Officer,
Chief Financial Officer and several other members of the Companys senior management. The
Companys Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2004, the Companys disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by the Company in the reports it files or submits under the
Act is (i) accumulated and communicated to the Companys management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms. The Company does not expect that its disclosure controls and procedures will prevent all error
and all fraud. A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure are met. Because
of the inherent limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control procedure also is based
in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or fraud may occur
and not be detected. The annual report of management on the effectiveness of our internal control over financial
reporting and the attestation report thereon issued by our independent registered public accounting
firm are set forth under Managements Report on Internal Control Over Financial Reporting and
Report of Independent Registered Public Accounting Firm under Item 8. Financial Statements and
Supplementary Data. Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2004, no changes occurred in the Companys internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 Item 9B. Other Information None. 65




---



##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant Executive Officers and Directors of the Registrant The executive officers of the Registrant are identified below. Name
    
    Age
    
    PositionGeorge W. Haligowski
    
    
    50
    
    
    Chairman of the Board, President and Chief Executive Officer
of ITLA Capital and the BankNorval L. Bruce
    
    
    63
    
    
    Vice Chairman of the Board and Chief Credit Officer of ITLA
Capital and the BankTimothy M. Doyle
    
    
    48
    
    
    Senior Managing Director and Chief Financial Officer of
ITLA Capital and the BankDon Nickbarg
    
    
    52
    
    
    Senior Managing Director and Chief Banking Officer of ITLA
Capital and the BankMaria Kunac
    
    
    52
    
    
    Senior Managing Director and Chief Lending Officer of ITLA
Capital and the Bank
 George W. Haligowskihas served as ITLA Capitals Chairman of the Board, President and Chief
Executive Officer since inception. He has also served as the Banks Chairman of the Board and Chief
Executive Officer since 1992, and was the Banks President from 1992 to October 1997. In 2000 he
was again appointed as President of the Bank. From 1990 to the present, he has also served as
President, Chief Executive Officer and Principal of Halivest International, Ltd., an international
finance and asset management company. He was previously employed as a Vice President by Shearson
Lehman Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to 1988), and by Avco Financial
Services as Regional Director of its Japanese branch operations (1976 to 1981), as Training
Coordinator for Avco Thrift and Loan (1976) and as a Branch Manager (1974 to 1976). Norval L. Brucehas served as the Vice Chairman and Chief Credit Officer for ITLA Capital and
the Bank since June of 1999. He was previously President and Chief Operating Officer of the Bank
from October 1997 to June 1999, and previously was the Executive Vice President and Chief Credit
Officer of the Bank from 1990 to October 1997. Mr. Bruce was appointed a director of the Bank and
ITLA Capital in January 1997 and September 1997, respectively. From 1988 to 1989, he served as
Executive Vice President and Chief Credit Officer of Security Pacific Bank, Nevada. He was
previously employed by Security Pacific Bank from 1965 to 1988 in a variety of positions including
management positions in which he was responsible for both loan origination and credit quality. Timothy M. Doylehas served as Senior Managing Director and Chief Financial Officer of ITLA
Capital and the Bank since May 2000. He was previously Managing Director and Chief Administrative
Officer of ITLA Capital and the Bank since 1996. Before joining the Bank, he was the Controller and
Director of Operations at Northeastern Plastics from 1995 to 1996; Assistant Controller of Alpha
Wire Corporation from 1992 to 1994; and Vice President and Chief Financial Officer of Halivest
International, Ltd. from 1989 to 1991. From 1982 to 1988, he was the Corporate Controller of the
Shepaug Corporation. Don Nickbarghas served as Senior Managing Director and Chief Banking Officer of ITLA Capital
and the Bank since November 2002. He has served in several other capacities, including Senior
Managing Director and Chief Operating Officer, Managing Director of Asset Acquisition and New
Business Development, Chief Administrative Officer as well as Treasurer. Prior to joining ITLA
Capital in 1998, he was a consultant with Centennial International LLC from 1996 to 1998; Chief
Financial Officer of AIOC Corporation from 1994 to 1996; Vice President and Team Leader at The
Chase Manhattan Bank from 1991 to 1994; Vice President and Treasurer of Drexel Burnham Lambert
Holdings, Ltd. from 1986 to 1990; Vice President with The Hong Kong and Shanghi Banking Company
from 1980 to 1986; and Assistant Treasurer with the Swiss Bank Corporation from 1976 to 1980. Maria Kunachas served as Senior Managing Director and Chief Lending Officer of ITLA Capital
and the Bank since November 2004. Prior to joining ITLA Capital, Ms. Kunac served as the Executive
Vice President for First National Bank. During her tenure at First National Bank from 1996 to 2004,
she also managed the Real Estate Loan Division, and served as the Deputy Chief Credit Officer and
Special Assets Manager. From 1993 to 1995, she was Executive Vice President and Chief Lending
Officer of First Fidelity Thrift & Loan, and was Senior Vice President for Great American Bank from
1979 to 1992. 66




---



##### Table of Contents



The directors of ITLA Capital, excluding Mr. Haligowski and Mr. Bruce, are identified below. Preston Martin,age 81, is the former Vice Chairman of the Federal Reserve Board of Governors.
Mr. Martin previously served as a Senior Advisory Director to the Board. Mr. Martin is currently
Chairman of the Board of Martin Associates, a San Francisco based financial services company. Mr.
Martin was Chairman and Chief Executive Officer of Seraro Corporation, a Sears Roebuck enterprise,
PMI Mortgage Insurance Corporation and PMI Mortgage Corporation. Mr. Martin was also Professor of
Finance and Director of Executive Programs at the University of Southern California. Jeffrey L. Lipscomb, age 51, is an Investment Advisory Associate with AXA Advisors and
formerly was a Registered Principal and Assistant Manager of the San Diego office of Equitable
Financial Companies since 1986, handling corporate group benefits and personal financial planning.
Mr Lipscomb was also with Kidder Peabody from 1983 to 1986. Sandor X. Mayuga, age 57, is a member of the California State Bar and has been of counsel to
the law firm of Keesal, Young & Logan since April 2004. Prior to that, he was a member of the law
firm of Tisdale & Nicholson since 1994. He conducted his own law practice from 1983 to 1994 and was
a partner in the Financial Institutions Department of Finley, Kumble, Wagner, Heine, Underberg,
Manly & Casey, a New York-based national law firm, from 1980 to 1983. Previously, he served as
Assistant General Counsel of Hunt-Wesson Foods, Inc., a subsidiary of Norton Simon, Inc., and was
associated with two large regional law firms in Los Angeles County. Since 1980, Mr. Mayugas
practice has focused on the representation of financial institutions and other finance-related
businesses in corporate, transactional and regulatory matters. Hirotaka Oribe, age 70, is a licensed architect with international experience in real estate
development and urban planning. Since 1993, Mr. Oribe has served as an advisor to Kajima
Development Resources, Inc. From 1979 to 1993, Mr. Oribe was Executive Vice President, Chief
Operating Officer and a Director of Kajima Development Corporation, a firm engaged in development
and construction of single-family and multi-family housing, office buildings, retail space and land
development. Mr. Oribe previously held other positions with affiliates of Kajima Corporation of
Japan from 1973 to 1979 and was a practicing architect from 1962 to 1973. Robert R. Reed, age 68, is retired from Household International where he was employed in
various positions from 1960 to 1992. Mr. Reed served as Vice President of Household Bank from 1980
to 1992. Mr. Reed was previously employed in management positions with Household Financial
Corporation from 1962 to 1980. From 1995 to 2000, Mr. Reed served as a director of the Santa Ana
City Cable Television Review Board. Audit Committee Membership The Audit Committee of ITLA Capitals Board of Directors consists of Directors Martin
(Chairman), Lipscomb and Reed. The Board of Directors has determined that Mr. Martin is an audit
committee financial expert, as defined in the SECs rules, and that Mr. Martin is independent,
as independence is defined for audit committee members in the listing standards of the NASDAQ Stock
Market. Code of Ethics We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer, and persons performing similar functions, and to
all of our other employees and our directors. A copy of our code of ethics is available on our
website, located at www.itlacapital.com. Section16(a)Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires ITLA Capitals directors and
executive officers, and persons who own more than 10% of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of changes in ownership
of common stock and other equity securities of ITLA Capital. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish ITLA Capital with copies of all Section
16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and
written representations that no other reports were required, during the fiscal year ended December
31, 2004, all Section 16(a) filing requirements applicable to its officers, directors and greater
than 10% beneficial owners were complied with, except for the inadvertent failure by Director
Martin to timely file a Form 4 to report one transaction. 67




---



##### Table of Contents



Item 11. Executive Compensation The following table sets forth the compensation of the Chief Executive Officer and the four other
highest earning executive officers of ITLA Capital and the Bank with salary and bonus greater than
$100,000 for the years ended December 31, 2004, 2003 and 2002 respectively (the named
executives). Long - TermAnnual Compensation
    
    Compensation
    
    
    All OtherSalary
    
    
    Bonus
    
    
    Other Annual
    
    Options
    
    
    CompensationName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    Compensation ($)
    
    (#)(1)
    
    
    ($)George W. Haligowski
    
    
    2004
    
    
    $
    498,750
    
    
    $
    1,179,750
    (2)
    
    $
    125,346
    (3)
    
    
    
    
    $
    296,938
    (4)Chairman of the Board, President
    
    
    2003
    
    
    $
    496,202
    
    
    $
    1,000,813
    (2)
    

    $
    174,970
    (3)
    
    
    
    
    $
    208,081and Chief Executive Officer
    
    
    2002
    
    
    $
    443,350
    
    
    $
    671,275
    (2)
    
    $
    79,850
    (3)
    
    37,500
    
    
    $
    286,183Norval L. Bruce
    
    
    2004
    
    
    $
    230,769
    (8)
    
    $
    165,750
    (10)
    
    $
    
    
    
    
    
    
    $
    69,294
    (5)Vice Chairman of the Board and Chief
    
    
    2003
    
    
    $
    230,769
    (8)
    
    $
    153,500
    (10)
    
    $
    
    
    
    
    
    
    $
    45,263Credit Officer
    
    
    2002
    
    
    $
    217,469
    (8)
    
    $
    109,504
    (10)
    
    $
    
    
    
    20,000
    
    
    $
    81,472Timothy M. Doyle
    
    
    2004
    
    
    $
    195,000
    
    
    $
    157,500
    
    
    $
    
    
    
    
    
    
    $
    30,951
    (6)Senior Managing Director and
    
    
    2003
    
    
    $
    193,917
    
    
    $
    137,750
    
    
    $
    
    
    
    
    
    
    $
    30,756Chief Financial Officer
    
    
    2002
    
    
    $
    180,726
    
    
    $
    91,004
    
    
    $
    
    
    
    15,000
    
    
    $
    62,231Don Nickbarg
    
    
    2004
    
    
    $
    175,528
    
    
    $
    110,750
    (11)
    
    $
    
    
    
    
    
    
    $
    28,458
    (7)Senior Managing Director and
    
    
    2003
    
    
    $
    175,528
    
    
    $
    98,750
    (11)
    
    $
    
    
    
    
    
    
    $
    24,949Chief Banking Officer
    
    
    2002
    
    
    $
    163,004
    
    
    $
    83,003
    (11)
    
    $
    
    
    
    15,000
    
    
    $
    68,115Maria Kunac(12)
    
    
    2004
    
    
    $
    30,000
    
    
    $
    87,000
    
    
    $
    
    
    
    
    
    
    $
    18,071
    (8)Senior
Managing Director and
    
    
    2003
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    $
    Chief
Lending Officer
    
    
    2002
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    $
    Scott Wallace
    
    
    2004
    
    
    $
    150,000
    
    
    $
    81,000
    
    
    $
    
    
    
    
    
    
    $
    22,382
    (9)Managing Director- Finance and
Treasurer
    
    
    2003
    
    
    $
    149,084
    
    
    $
    67,500
    
    
    $
    
    
    
    
    
    
    $
    21,8742002
    
    
    $
    139,545
    
    
    $
    69,503
    
    
    $
    
    
    
    5,000
    
    
    $
    23,242
   (1)
    
    Options were granted on various dates and vest one-third on each of the three
subsequent anniversary dates of issuance.(2)
    
    $ 890,474 of the 2004 bonus was deferred at the election of the named executive
officer under ITLA Capitals Nonqualified Deferred Compensation plan. The respective
amounts were $173,315 and $400,000 for 2003 and 2002.(3)
    
    Represents the aggregate incremental cost to the Company of perquisites and other personal
benefits provided to Mr. Haligowski. Included within the amounts for 2004 and 2003 is the
incremental cost to the Company of $33,000 and $83,500, respectively, for Mr. Haligowskis
use of chartered air transportation services. Included within the amount for 2002 is the incremental cost to the
Company of $23,000 for Mr. Haligowskis use of a company owned vehicle. During 2004, 2003 and
2002, none of the other named executives received perquisites or other personal benefits in excess
of the lesser of $50,000 or 10% of their salary and bonus reported for the year.(4)
    
    Consists of (a) $ 30,000 in supplemental
housing payments, (b) $ 63,347 in life insurance premiums, (c) $ 6,150 in employer
contributions to ITLA Capitals 401(k) plan, (d) $ 112,769 in preferential interest on
employee savings accounts in 2004, and (e) an allocation of 9,408 shares of restricted
stock under the Supplemental Executive Retirement Plan (SERP) valued at $9.00 per share
(see Supplemental Executive Retirement Plan below) for an aggregate value of $ 84,672.(5)
    
    Consists of (a) $ 3,247 in life insurance
premiums, (b) $ 6,150 in employer
contributions to
ITLA Capitals 401(k) plan, (c) $ 36,893 in preferential
interest on employee savings accounts in 2004, and (d) an
allocation of
2,556 shares of restricted stock under the Supplemental Executive Retirement Plan (SERP) valued at $9.00 per share (see
Supplemental Executive Retirement Plan below) for an aggregate value of $ 23,004.(6)
    
    Consists of (a) $ 5,257 in life insurance
premiums, (b) $6,150 in employer contributions to ITLA Capitals
401(k) plan, (c) $41 in
preferential interest on employee savings accounts in 2004, and (d) an allocation of 2,167
shares of restricted stock under the Supplemental Executive Retirement Plan (SERP)
valued at $9.00 per share (see Supplemental Executive Retirement Plan below) for an
aggregate value of $ 19,503.(7)
    
    Consists of (a) $ 828 in life insurance
premiums, (b) $6,150 in employer contributions to
ITLA Capitals 401(k) plan, (c) $ 3,984 in preferential interest
on employee savings accounts in 2004, and (d) an allocation of
1,944 shares of restricted stock under the Supplemental Executive Retirement Plan (SERP) valued at $9.00 per share (see
Supplemental Executive Retirement Plan below) for an aggregate value of $ 17,496.(8)
    
    Consists of (a) $71 in life insurance premiums, and (b) an allocation of 2,000 shares of
restricted stock under the Supplemental Executive Retirement Plan (SERP) valued at $9.00 per
share (see Supplemental Executive Retirement Plan below) for an aggregate value of $18,000.(9)
    
    Consists of (a) $ 300 in life insurance
premiums, (b) $6,150 in employer contributions to ITLA
Capitals 401(k) plan, (c) $ 929 in
preferential interest on employee savings accounts in 2004, and (d) an allocation of 1,667
shares of restricted stock under the Supplemental Executive Retirement Plan (SERP)
valued at $9.00 per share (see Supplemental Executive Retirement Plan below) for an
aggregate value of $ 15,003. 68




---



##### Table of Contents



(10)
    
    $ 115,885 of the 2004 salary and $102,023 of the 2004 bonus was deferred at the election of the named executive
officer under
ITLA Capitals Nonqualified Deferred Compensation plan. The
respective amounts were $115,385 and $91,067 in 2003 and
$108,735 and none in 2002.(11)
    
    $ 10,000 of the 2004 bonus was deferred at the election of the named executive
officer under ITLA Capitals Nonqualified Deferred Compensation plan. The respective
amounts were $20,000 in 2003 and 2002.(12)
    
    Ms. Kunac joined ITLA Capital on
November 1, 2004. Option Grants for 2004 No stock options or stock appreciation rights were granted to the named executive officers in 2004. Option Exercises and Values at December 31, 2004 The following table sets forth certain information concerning stock options exercised by the
named executive officers in 2004 and the number and value of stock options held by the named
executive officers at December 31, 2004. Option Values at December 31, 2004 Shares

    
    
    
    
    
    Number of Unexercised

    
    Value of UnexercisedAcquired on

    
    Value

    
    Option at

    
    In - the -
Money OptionsExercise

    
    Realized

    
    Fiscal Year - End (#)

    

at
Fiscal Year - End (1)($)Name
    
    (#)

    
    ($)

    
    Exercisable

    
    Unexercisable

    


    Exercisable

    
    UnexercisableGeorge W. Haligowski
    
    
    83,198
    
    
    
    3,497,556
    
    
    
    201,802
    
    
    
    12,500
    
    
    
    9,030,920
    
    
    
    447,375Norval L. Bruce
    
    
    43,532
    
    
    
    1,681,687
    
    
    
    3,833
    
    
    
    6,667
    
    
    
    137,195
    
    
    
    238,600Timothy M. Doyle
    
    
    
    
    
    
    n/a
    
    
    
    70,000
    
    
    
    5,000
    
    
    
    2,987,125
    
    
    
    178,950Don Nickbarg
    
    
    
    
    
    
    n/a
    
    
    
    35,000
    
    
    
    5,000
    
    
    
    1,472,550
    
    
    
    178,950Maria Kunac
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Scott Wallace
    
    
    
    
    
    
    n/a
    
    
    
    23,333
    
    
    
    1,667
    
    
    
    968,627
    
    
    
    46,243
   (1)
    
    The difference between the aggregate option exercise price and the closing price of
$58.79 of the underlying shares at December 31, 2004. Agreements with Mr. Haligowski We have entered into an employment agreement with Mr. Haligowski. The employment agreement
provides for an initial employment term of five years, with the agreement automatically annually
extending for an additional one-year period each year unless either party provides the other with
at least 90 days notice of the non-extension or termination, provided that if a change in
control, as defined in the agreement, occurs, the term of the agreement will be automatically
extended so that it expires 60 months after the change in control. The employment agreement
provides that we may terminate Mr. Haligowski for cause, as defined in the employment agreement.
In the event Mr. Haligowski is involuntarily terminated, as defined in the employment agreement,
including following a change of control, as defined in the employment agreement, Mr. Haligowski
will be entitled to receive: (i) a lump sum cash payment determined by multiplying the amount of
the cash bonus or cash incentive compensation paid to him for the most recently completed fiscal
year by a fraction, the numerator of which is the number of days in the year elapsed through the
date of termination and the denominator of which is 365; (ii) during the remaining term of the
agreement (or for five years, if longer, if a change in control has occurred) his base salary
calculated at the highest annual rate during the three years prior to his involuntary termination
and the average amount of cash bonus and incentive compensation paid for the two years prior to his
involuntary termination, if any; (iii) the continuation of all employment related benefits for the
60 months following the date of termination; (iv) the immediate vesting of any stock options and
restricted stock awards previously granted and outstanding; and (v) the transfer to him of title to
the Company-owned vehicle currently used by him. If his employment is involuntarily terminated
following a change of control, Mr. Haligowski will also be retained as a consultant for an eighteen
month period at a monthly consulting fee equal to 75% of his base salary. If a change in control
occurs, regardless of whether his employment is involuntarily terminated, Mr. Haligowski will
receive an additional contribution to his account in our Supplemental Executive Retirement Plan
equal to 3.95 times his base salary. In addition, stock options and restricted stock awards
previously granted and outstanding, salary continuation plans, equity club memberships and other
fringe benefits shall immediately vest following a change of control. The annual base salary for
Mr. Haligowski under the employment agreement is currently $498,750 (which may be increased from
time to time by the Board of Directors). The employment agreement also provides for, among other
things, annual incentive compensation, disability pay, participation in stock benefit and salary
continuation plans, and other fringe benefits, including a supplemental housing payment of not less
than $2,500 per month, an automobile allowance of not less than $1,950 per month, and life
insurance coverage in an amount not less than four times Mr. Haligowskis annual salary. In March
2000, we adopted a Salary Continuation Plan for the benefit of Mr. Haligowski. Under the terms of
this plan, Mr. Haligowski will be entitled to receive monthly payments, based on 75% of his average 69




---



##### Table of Contents



monthly base salary for the three years preceding the year in which the plan benefits become
payable, for a 15 year period. The benefits under the plan become payable on the earlier of Mr.
Haligowskis retirement upon reaching age 65, or his death, disability, or involuntary termination
(other than a termination for cause, as defined in the agreement). If Mr. Haligowski voluntarily
terminates his employment prior to reaching age 65, the benefit payable to him under the plan will
be prorated based on the ratio of the actual period that he worked while the plan is in effect to
the scheduled period of time that he would have worked if he had continued to work until reaching
age 65. If we undergo a change of control, the vesting of plan benefits accelerates and become
payable monthly over a ten-year period, with an increased monthly payment to reflect the shorter
payment period. Change of Control Agreements We have entered into change of control agreements with Messrs. Bruce, Doyle, Nickbarg and
Wallace. The change in control agreements have initial terms of one year and shall automatically
extend for additional one-year periods upon a change of control, as defined in the agreement, or
upon their anniversary date, unless either party provides the other with at least 90 days notice of
termination. These agreements provide that in the event the officer is involuntarily terminated
within 24 months following a
change of control, as defined in the agreement, the officer shall be entitled to receive upon
such termination an amount equal to the greater of the annualized salary as in effect on the date
of the change of control or the date of termination for a period of up to 18 months and a pro rata
portion of his bonus from the previous year. In addition we will maintain health, dental and life
insurance benefits for up to the next 18 months for each officer and transfer title to our owned
vehicle currently used by the officer or, in the event the officer receives a monthly cash car
allowance in lieu of the use of our vehicle, we shall pay an amount equal to up to 18 times the
monthly allowance. Stock options and restricted stock awards previously granted and outstanding
will also immediately vest. The annual base salary for Messrs. Bruce, Doyle, Nickbarg and Wallace
is currently $230,000, $195,000, $175,000 and $150,000, respectively. Both Mr. Haligowskis employment agreement and the change of control agreements also provide
that to the extent any payments made may be considered excess parachute payments under Section 280G
of the Internal Revenue Code that are subject to excise tax, we will pay an additional amount
needed to insure that the amount of payments and value of benefits received equals the same amount
in the absence of any excise tax. Supplemental Executive Retirement Plan (SERP) The SERP provides that the compensation committee may make restricted stock awards under ITLA
Capitals Recognition and Retention Plan (RRP) on a tax deferred basis through the SERP. The SERP
further provides that Mr. Haligowski shall receive an allocation annually, subject to the
performance terms of the RRP, of a restricted stock award equal to one-third of his base salary and
all other participants shall receive an award equal to one-fifth of base salary subject to the
approval of the compensation committee, which may also allocate a greater or lesser award or no
award in its discretion. For this purpose, each share of common stock has been valued at $9.00 per
share, the fair market value of the common stock on the date of issuance to the SERP. A participant
shall only have a vested right to amounts allocated to his or her account if the participant is
employed on the last day of a three year vesting cycle or earlier at the discretion of the
compensation committee. Upon a change in control (as defined in the SERP), the participant shall
have an accelerated vesting of all shares allocated to his or her account. The participant shall
only have a right to vested shares in his or her account upon normal retirement, death, disability
or termination. The last day of the next vesting cycle for shares allocated to the SERP accounts
for the benefit of the participants for the years 2003, 2004 and 2005 is December 31, 2005. For
additional discussion, please see Benefits  Recognition and Retention Plan. Benefits Insurance Plans.All full-time employees, after approximately three months employment with us,
are covered under group plans providing major medical, dental, and vision benefits, and long-term
disability, travel accident, accidental death and dismemberment insurance, and group term life
insurance. Salary Savings Plan.The ITLA Capital Salary Savings Plan is a cash or deferred arrangement
under Section 401(k) of the Internal Revenue Code (the Code) designed to provide employees with
the opportunity to accumulate retirement funds (the 401(k) Plan). Permanent employees age 21 or
older are eligible to participate in the 401(k) Plan as of January 1 or July 1 first following
their hire date. Under the 401(k) Plan, subject to limitations imposed under Section 401(k) and
Section 415 of the Code, a participant may elect to defer compensation by directing us to
contribute such amount to the 401(k) Plan on such employees behalf. We currently make matching
contributions to the 401(k) Plan equal to 50% of the first 6% of the participants monthly
contribution. The Board reviews the match on an annual basis, and we may also make discretionary
contributions to the 401(k) Plan. Compensation for purposes of the 401(k) Plan is defined as a
participants compensation from us as reported annually on Form W-2, including contributions to the
401(k) Plan by the employee, and contributions by us in the employees behalf to any other pension,
insurance, welfare or other 70




---



##### Table of Contents



employee benefit plan. Under the 401(k) Plan, a separate account is established for each
participant.
Participants are always 100% vested in their contributions and the earnings thereon. Participants
become vested in employer contributions and the earnings thereon at the rate of 20% per year
commencing with the first full year of service (defined as completion of 12 consecutive months of
work). Participants become fully vested in employer contributions and the earnings thereon on their
fifth anniversary of employment, or in the event of death, permanent disability or attainment of
age 65 while employed by us. The 401(k) Plan provides for in-service hardship distributions of
elective deferrals, as well as loans of a portion of vested account balances. Distributions from
the 40l(k) Plan are made upon termination of service in a lump sum or in annual installments over a
period of years at the election of the participant with the right to take a lump sum payment at any
time during such period. Nonqualified Deferred Compensation Plans. The ITLA Capital Corporation Supplemental Salary
Savings Plan (the Supplemental Plan) and Nonqualified Deferred Compensation Plan (the Deferral
Plan) are designed to provide additional retirement benefits for certain officers and highly
compensated employees. The Supplemental Plan provides participating employees with an opportunity
to make up benefits not available under the 401(k) Plan due to any application of limitations on
compensation and maximum benefits under the 401(k) Plan. Benefits under the Supplemental Plan are
provided at the same time and in the same form as benefits under the 401(k) Plan, and become
taxable to the participant at that point. The Deferral Plan allows a participant to defer receipt
of, and current taxation upon, designated portions of the participants direct cash compensation
until a future date specified by the participant. Both of these plans are unfunded plans, meaning
that all benefits payable there under are payable from our general assets, and funds available to
pay benefits are subject to the claims of our general creditors. We have established a Rabbi Trust
with a third party FDIC insured financial institution which holds the contributions to the
Supplemental Plan and Deferral Plan, for the purpose of providing the benefits set forth under the
terms of the plans. Participants only have the rights of unsecured creditors with respect to the
Rabbi Trust assets. Stock Plans. We have adopted the 1995 Employee Stock Incentive Plan and the 1995 Stock Option
Plan for Nonemployee Directors (collectively, the Stock Option Plan) pursuant to which officers,
directors and our employees are eligible to receive options to purchase Common Stock. The purpose
of the Stock Option Plan is to enable us to attract, retain and motivate employees by providing for
or increasing their proprietary interests in ITLA Capital, and in the case of nonemployee
directors, to attract such directors and further align their interests with our interests. Every
one of our employees is eligible to be considered for the grant of awards under the Stock Option
Plan. An amendment to the Stock Plan increasing the number of shares authorized for awards under
the Stock Plan by 311,500 shares was approved by ITLA Capitals shareholders on June 29, 2001. The
maximum number of shares of Common Stock that may be issued pursuant to awards granted under the
Stock Option Plan is 1,311,500 shares of which a maximum of 550,000 shares may be awarded during
the first year of the Stock Option Plan, with annual awards thereafter limited to 100,000
additional shares during each of the next five years of the Stock Option Plan (with the shares
subject to the Stock Option Plan and all grants there under being subject to adjustments to prevent
dilution). The Stock Option Plan is administered by the Compensation Committee of the Board of Directors,
except that grants to nonemployee directors are made by the Board of Directors pursuant to a
predetermined formula, as described below. The Committee consists of two or more nonemployee
directors of ITLA Capital, and has full and final authority to select the employees to receive
awards and to grant such awards. Subject to provisions of the Stock Option Plan, the Committee has
a wide degree of flexibility in determining the terms and conditions of awards and the number of
shares to be issued pursuant thereto. The expenses of administering the Stock Option Plan are borne
by us. The Stock Option Plan authorizes the Committee to enter into any type of arrangement with an
eligible employee that, by its terms, involves or might involve the issuance of Common Stock or any
other security or benefit with a value derived from the value of Common Stock. Awards to employees
are not restricted to any specified form or structure. Stock options to purchase 5,000 shares of
Common Stock were automatically granted to the nonemployee directors upon the completion of our
initial public offering and upon their election to the Board of Directors, and options to purchase
an additional 1,000 shares are granted annually for the following five years, provided such
individuals continue to serve as directors. Awards may not be granted under the Stock Option Plan after the tenth anniversary of the
adoption of the Stock Option Plan. As of December 31, 2004, we have granted an aggregate of 1,568,250 options under the
Stock Option Plan, of which 397,500 have been granted to Mr. Haligowski, 115,000, 75,000, 40,000
and 25,000 have been granted to Messrs. Bruce, Doyle, Nickbarg, and Wallace, respectively, 47,000
have been granted to non-employee directors, and 868,750 have been granted to other employees, of
which 583,894 have been exercised and 392,017 have been forfeited. The exercise price per share of
the options granted range from $10.00 to $48.26 per share and generally vest 33-1/3% per year,
beginning with the first anniversary of the date of the grant. 71




---



##### Table of Contents



Recognition and Retention Plan. We have adopted the Recognition and Retention Plan (RRP),
the purpose of which is to promote our long-term interests and our shareholders by providing a
means for attracting and retaining officers and employees of ITLA Capital and its affiliates. Under
the RRP, awards of restricted shares of our common stock may be made to employees as additional
long-term incentive compensation. Every one of our employees is eligible to be considered for the
grant of awards under the RRP. The maximum number of shares of common stock which may be issued
pursuant to the RRP is 300,000 shares over the ten year life of the plan. No RRP shares may be
granted in any fiscal year in which the Bank fails to maintain an adequately capitalized
designation under the FDIC regulations and ITLA Capital fails to achieve a return on average assets
of at least 50 basis points for the fiscal year. The RRP was approved by the shareholders and is
administered by the Compensation Committee of the Board of Directors which has a wide degree of
flexibility, within the provisions of the RRP, in determining the terms and conditions of awards
and the number of shares to be issued pursuant thereto. The RRP shares granted to date have been
allocated through the Supplemental Executive Retirement Plan as discussed above. Directors Compensation Directors Fees. During 2004, each non-employee director was paid a monthly fee of $2,250 for
serving on our Board of Directors and $750 for each Board or Committee meeting attended for service
on such committee. In addition, Director Reed received an honorarium of $5,000 for his active
assistance in legislative matters during 2004, Director Lipscomb received an honorarium of $5,000
for his time and assistance with compensation matters, and Director Oribe received an honorarium of
$15,000 for his time and assistance with Japanese business matters and his extensive work with the
Executive Committee. In 2004, Director Martin received an annual retainer fee of $15,000 for his
service as Chairman of the Audit Committee and an honorarium of $15,000 for his time and assistance
with matters concerning the Companys recently executed agreement with Fannie Mae. Voluntary Retainer Stock and Deferred Compensation Plan. In 1996, we adopted the Voluntary
Retainer Stock and Deferred Compensation Plan for Outside Directors (the Outside Director Plan).
The Outside Director Plan provides for the deferral of compensation earned by non-employee
directors in the form of Stock Units (Stock Units) in a Stock Unit account (Stock Unit
Account). Directors may elect to have up to 100% of their fees converted into stock units. For dividends paid with respect to our common stock, each non-employee director has credited
to his Stock Unit Account an additional number of Stock Units in an amount determined under the
Outside Director Plan. Each non-employee directors Stock Unit Account will be settled by
delivering to the non-employee director (or his beneficiary) the number of shares of our common
stock equal to the number of whole Stock Units then credited to the non-employee directors Stock
Unit Account, in either (i) a lump sum or (ii) substantially equal annual installments over a period not to exceed ten years. To date, no amount have been deferred under the Outside Director Plan. Directors Stock Option Plans. Directors are also eligible to receive stock option grants as
described above. On October 30, 2004, Preston Martin was granted an option to purchase 1,000 shares
of common
stock with an exercise price of $48.26 per share. The option is scheduled to vest in full on
October 30, 2005 and expire on October 30, 2014. No other options were granted to Directors during
2004. Compensation Committee Interlocks and Insider Participation During 2004, the Compensation Committee was comprised of Directors Lipscomb and Oribe. 72




---



##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters At
March 14, 2005, we had 5,797,224 shares of common stock outstanding. The
following table sets forth, as of March 14, 2005, certain information as to those persons
who were known by management to be beneficial owners of more than five percent of our common stock
outstanding. Beneficial Owner
    
    Shares Beneficially Owned
    
    
    Percent of ClassFranklin Mutual Advisors, LLC
    
    
    445,796
    (1)
    
    
    7.69
    %51 John F. Kennedy Parkway
Short Hills, NJ 07078Dimensional Fund Advisors
    
    
    421,300
    (2)
    
    
    7.27
    %1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401Wellington Management Company, LLP
    
    
    414,230
    (3)
    
    
    7.15
    %75 State Street
Boston, MA 02109Eubel Brady & Suttman Asset Management, Inc, et. al
    
    
    398,238
    (4)
    
    
    6.87
    %7777 Washington Village Drive, Suite 210
Dayton, OH 45459Thomson
Horstmann & Bryant, Inc.
    
    
    371,505
    (5)
    
    
    6.41
    %Park 80 West, Plaza Two
Saddle Brook, NJ 07663Barclays Global Advisors, NA, et. al
    
    
    367,763
    (6)
    
    
    6.34
    %45 Fremont Street
San Franciso, CA 94105Friedman,
Billings, Ramsey Group, Inc.
    
    
    351,319
    (7)
    
    
    6.06
    %1001 19th Street North
Arlington, VA 22209George W. Haligowski
    
    
    350,178
    (8)
    
    
    5.87
    %888 Prospect Street, Suite 110
La Jolla, CA 92037Granite Capital, L.P, et. al
    
    
    318,100
    (9)
    
    
    5.49
    %126 East
 56th
Street, 25th Floor
New York, New York 10022
   (1)
    As reported by Franklin Mutual Advisors, LLC (Franklin) on a Schedule 13G amendment
filed on February 14, 2005 with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. Franklin reported sole voting and dispositive
powers as to all
of the 445,796 shares, and shared voting and dispositive powers as to none of the 445,796
shares covered by the report.  (2)
    As reported by Dimensional Fund Advisors (Dimensional) on a Schedule 13G amendment
filed on February 9, 2005 with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Dimensional reported sole voting and dispositive powers
as to all of the 421,300 shares, and shared voting and dispositive powers as to none of
the 421,300 shares covered by the report.  (3)
    As reported by Wellington Management Company, LLP (WMC) on a Schedule 13G amendment
filed on February 14, 2005 with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. WMC reported sole voting and dispositive
powers as to none of the 414,230 shares, shared voting power as to 222,300 shares, and
shared dispositive power as to all of the 414,230 shares covered by the report. 73




---



##### Table of Contents



(4)
    As reported by Eubel Brady and Suttman Asset Management, Inc. (EBS) Ronald L.
Eubel, Mark E. Brady, Robert J. Suttman, William E. Hazel, Bernard J. Holtgreive on a
Schedule 13G amendment filed on February 14, 2005 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. EBS reported sole voting
and dispositive powers as to none of the 398,238 shares, and shared voting and dispositive
powers as to all of the 398,238 shares covered by the report. According to the Schedule 13G amendment, Messrs. Eubel, Brady, Suttman, Hazel and
Holtgreive may, as a result of their ownership in and positions with EBS, be deemed to be
indirect beneficial owners of the equity securities held by EBS.  (5)
    As reported by Thomson Horstmann & Bryant, Inc. (Thomson) on a Schedule 13G
amendment filed on January 5, 2005 with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. Thomson reported shared voting and
dispositive powers as to none of the 371,505 shares, sole voting power as to 190,700
shares, and sole dispositive power as to all of the 371,505 shares covered by the report.  (6)
    As reported by Barclays Global Investors, NA., Barclays Global Fund Advisors,
Barclays Global Investors, Ltd., Barclays Global Investors Japan Trust and Banking Company
Limited, Barclays Life Assurance Company Limited, Barclays Bank PLC., Barclays Capital
Securities Limited, Barclays Capital Inc., Barclays Private Bank & Trust (Isle of Man)
Limited, Barclays Private Bank and Trust (Jersey) Limited, Barclays Bank Trust Company
Limited, Barclays Bank (Suisse) SA., and Barclays Private Bank Limited, Bronco (Barclays
Cayman) Limited, Palomino Limited, and HYMF Limited on a Schedule 13G amendment filed on
February 14, 2005 with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. With respect to the 367,763 shares listed, Barclays
Global Investors, NA., reported sole voting power as to 260,510 shares, sole dispositive
power as to 296,583 shares and shared voting and dispositive powers as to none of such
shares, Barclays Global Fund Advisors reported sole voting power as to 57,552 shares, sole
dispositive power as to 58,980 shares and shared voting and dispositive powers as to none
of such shares, and Barclays Capital Inc. reported sole voting and dispositive powers as
to 12,200 shares and shared voting and dispositive powers as to none of such shares.  (7)
    As reported by Friedman, Billings, Ramsey Group, Inc. (FBR) on a Schedule 13G
amendment filed on February 15, 2005 with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. FBR reported sole voting and dispositive
powers as to none of the 351,319 shares, and shared voting and dispositive powers as to
all of the 351,319 shares covered by the report.  (8)
    Includes 164,302 shares underlying stock options which are currently exercisable or
which will become exercisable within 60 days of March 14, 2005.  (9)
    As reported by Granite Capital, L.P. (Granite), Granite Capital II, L.P. (Granite
II), Granum Value Fund (Granum Value), Granite Capital L.L.C. (Granite L.L.C.),
Granum Capital Management, L.L.C. (Granum Management), Lewis M.
Eisenberg and Walter F. Harrison, III on a Schedule 13G amendment filed on February 14,
2005 with the Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended. With respect to the 318,100 shares listed, Granite reported sole voting and
dispositive
powers as to none of such shares, and shared voting and dispositive powers as to 266,754 of
such shares, Granite II reported sole voting and dispositive powers as to none of such
shares and shared voting and dispositive powers as to 16,446 of such shares, Granum Value
reported sole voting and dispositive powers as to none of such shares and shared voting and
dispositive powers as to 29,400 of such shares, Granite L.L.C. reported sole voting and
dispositive powers as to none of such shares and shared voting and dispositive powers as to
288,700 of such shares, Granum Capital Management reported sole voting and dispositive
powers as to none of such shares and shared voting and dispositive powers as to 29,400 of
such shares, and each of Messrs. Eisenberg and Harrison, as managing members of Granite
L.L.C. and Granum Management, reported sole voting and dispositive powers as to none of
such shares and shared voting and dispositive powers as to all 318,100 of such shares. 74




---



##### Table of Contents



The
following table sets forth, as of March 14, 2005, certain information as to the shares of
common stock beneficially owned by the directors and named executive officers and by all directors
and executive officers of ITLA Capital as a group. SharesBeneficiallyOwned
    
    
    Percent ofBeneficial Owner
    
    (1)
    
    
    ClassGeorge W. Haligowski
    
    
    350,178
    
    
    
    5.86
    %Timothy M. Doyle
    
    
    104,110
    
    
    
    1.77Norval L. Bruce
    
    
    46,886
    
    
    
    0.81Don Nickbarg
    
    
    50,705
    
    
    
    0.87Maria Kunac
    
    
    
    
    
    
    0.00Scott Wallace
    
    
    28,572
    
    
    
    0.49Sandor X. Mayuga
    
    
    10,800
    
    
    
    0.19Jeffrey L. Lipscomb
    
    
    10,600
    
    
    
    0.18Hirotaka Oribe
    
    
    10,200
    
    
    
    0.18Robert R. Reed
    
    
    7,000
    
    
    
    0.12Preston Martin
    
    
    6,666
    
    
    
    0.11All Directors and Executive Officers as a Group
(11 Persons)
    
    
    627,717
    
    
    
    10.19
   (1)
    
    Includes shares held directly, as well as an aggregate of 354,135 shares which are
subject to immediately exercisable options and options exercisable
within 60 days of March 14, 2005, under ITLA Capitals Stock Option Plan, vested shares held by the SERP, and
shares held in retirement accounts or by certain members of the named individuals
families or corporations for which an individual is an officer or director or held by
trust of which an individual is trustee or a substantial beneficiary, over which shares
the individual may be deemed to have sole or shared voting and/or dispositive power. The
above named individuals held exercisable options and options exercisable within 60 days of
March 14, 2005 as follows: Chairman Haligowski  164,302 shares; Director Lipscomb 
10,000 shares; Director Mayuga  10,000 shares; Director Oribe  10,000 shares; Director
Reed  5,000 shares; Director Martin  6,000 shares; Norval L. Bruce  10,500 shares;
Timothy M. Doyle  75,000 shares; Don Nickbarg  40,000 shares and Scott Wallace 
23,333 shares. The following table sets forth information as of December 31, 2004 with respect to
compensation plans under which shares of our common stock may be issued: Equity Compensation Plan Information Number of SharesRemaining AvailableNumber of Shares to
    
    
    
    
    
    
    for Future Issuancebe issued upon
    
    
    Weighted Average
    
    
    Under EquityExercise of
    
    
    Exercise Price of
    
    
    Compensation PlansOutstanding
    
    
    Outstanding
    
    
    (Excluding SharesOptions, Warrants
    
    
    Options, Warrants
    
    
    Reflected in thePlan Category
    
    and Rights
    
    
    and Rights
    
    
    First Column) (1)Equity compensation plans approved by
stockholders
    
    
    592,339
    
    
    $
    17.53
    
    
    
    260,267Equity compensation plans not approved
by stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    592,339
    
    
    $
    17.53
    
    
    
    260,267
   (1)
    
    This amount includes 125,000 shares issuable under our 1996 Voluntary Retainer Stock
and Deferred Compensation Plan for Outside Directors, described under Item 11. Executive
Compensation  Directors Compensation. Under the Companys 1995 Employee Stock Option and
Incentive Plan, up to all of the 130,267 shares remaining available for issuance under
that plan as of December 31, 2004 could be issued to plan participants pursuant to awards
of restricted stock, performance shares and/or performance units. 75




---



##### Table of Contents



Item 13. Certain Relationships and Related Transactions During the year, we utilized the services of
Tisdale & Nicholson. Director Mayuga was a
partner in that law firm for a portion of 2004. During that period, this law firm received $4,100
in legal fees from ITLA Capital and the Bank. During the year, we also utilized the services of Keesal, Young & Logan. Director Mayuga became of counsel to that law
firm after leaving Tisdale & Nicholson. During 2004, this law firm received $2,400 in legal fees from ITLA
Capital and the Bank. 
 Item 14. Principal Accountant Fees and Services During the fiscal years ended December 31, 2004 and 2003, Ernst & Young LLP provided various
audit, audit related and non-audit services to the Company. Set forth below are the aggregate fees
billed for these services:  (a)
    Audit Fees: Aggregate fees billed for professional services rendered for the audits
of the Companys annual financial statements and internal controls over financial
reporting, and reviews of financial statements included in the Companys Quarterly Reports
on Form 10-Q for those fiscal years: $ 277,000 - 2004; $225,250 - 2003.(b)
    Audit Related Fees: Aggregate fees billed for professional services rendered related
to audits of employee benefit plans, consultation related to the implementation of the
Sarbanes -Oxley Act, and consultation on accounting matters: $57,000 - 2004; $70,000 -
2003.(c)
    Tax Fees: Aggregate fees billed for professional services rendered related to tax
compliance, tax advice and tax return preparation: $153,000 - 2004; $101,000 - 2003.(d)
    All other fees: None - 2004; None - 2003. The audit committee preapproves all audit and permissible non-audit services to be provided by
Ernst & Young LLP and the estimated fees for these services. None of the services provided by
Ernst & Young LLP described in items (a)  (c) above was approved by the audit committee pursuant
to a waiver of the
pre-approved requirements of the SECs rules and regulations. 76




---



##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements: Our consolidated financial statements, and Report of Independent Registered Public Accountants
thereon, are included in this Form 10-K at the pages listed below: PageManagements Report on Internal Control Over Financial Reporting
    
    
    38Reports of Independent Registered Public Accounting Firm
    
    
    39Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    41Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    42Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for
the Years Ended December 31, 2004, 2003 and 2002
    
    
    43Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    44Notes to Consolidated Financial Statements
    
    
    45
 (a)(2) Financial Statement Schedules: All financial statement schedules have been omitted as the required information is
inapplicable or has been included in the Notes to Consolidated Financial Statements. (a)(3) Exhibits: See Exhibit Index. 77




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. ITLA CAPITAL CORPORATIONDate: March 16, 2005
    By:
    /s/   George W. HaligowskiGeorge W. HaligowskiChairman of the Board, President
and Chief Executive Officer(Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ George W. Haligowski
    
    Chairman of the Board, President and
    
    March 16, 2005Chief Executive OfficerGeorge W. Haligowski
    
    (Principal Executive Officer)/s/ Timothy M. Doyle
    
    Senior Managing Director and
    
    March 16, 2005Chief Financial OfficerTimothy M. Doyle
    
    (Principal Financial and Accounting Officer)/s/ Norval L. Bruce
    
    Director
    
    March 16, 2005Norval L. Bruce/s/ Jeffrey L. Lipscomb
    
    Director
    
    March 16, 2005Jeffrey L. Lipscomb/s/ Sandor X. Mayuga
    
    Director
    
    March 16, 2005Sandor X. Mayuga/s/ Robert R. Reed
    
    Director
    
    March 16, 2005Robert R. Reed/s/ Hirotaka Oribe
    
    Director
    
    March 16, 2005Hirotaka Oribe/s/ Preston Martin
    
    Director
    
    March 16, 2005Preston Martin
 78




---



##### Table of Contents



EXHIBIT INDEX Reference toPrior Fillingor ExhibitNumberRegulation S-K
    
    
    
    AttachedExhibit Number
    
    Document
    
    Hereto3.1
    
    Certificate of Incorporation
    
    
    **3.2
    
    Bylaws, as amended
    
    
    ****4
    
    Instruments Defining the Rights of Security Holders, Including Indentures
    
    
    ********10.1
    
    1995 Stock Option Plan For Nonemployee Directors
    
    
    *10.2
    
    1995 Employee Stock Incentive Plan
    
    
    ******10.3a
    
    Nonqualified (Non-Employer Securities) Deferred Compensation Plan
    
    
    *******10.3b
    
    Nonqualified (Employer Securities Only) Deferred Compensation Plan
    
    
    *******10.4
    
    Supplemental Salary Savings Plan
    
    
    *10.5
    
    Data Processing Agreement
    
    
    *10.6
    
    Employment Agreement with George W. Haligowski
    
    
    ****10.7
    
    Form of Change of Control Agreements with Norval L. Bruce, Timothy M. Doyle, Don Nickbarg, and Scott Wallace
    
    
    ***10.8
    
    Recognition and Retention Plan
    
    
    **10.9
    
    Voluntary Retainer Stock and Deferred Compensation Plan for Outside Directors
    
    
    *****10.10
    
    Supplemental Executive Retirement Plan
    
    
    *******10.11
    
    ITLA Capital Corporation Rabbi Trust Agreement
    
    
    ***10.12
    
    Salary Continuation Plan
    
    
    ****10.13
    
    Form of Incentive Stock Option Agreement under 1995 Employee Stock Incentive Plan
    
    
    10.1310.14
    
    Form of Non-Qualified Stock Option Agreement under 1995 Stock Option Plan for Nonemployee Directors
    
    
    10.1410.15
    
    Description of Named Executive Officer Salary, Bonus and Perquisite Arrangements for 2005
    
    
    10.1510.16
    
    Description of Director Fee Arrangements
    
    
    10.1611
    
    Statement Regarding Computation of Per Share Earnings
    
    
    Not Required13
    
    Annual Report to Security Holders
    
    
    None18
    
    Letter Regarding Change in Accounting Principles
    
    
    None21
    
    Subsidiaries of the Registrant
    
    
    2122
    
    Published Report Regarding Matters Submitted to Vote of Security Holders
    
    
    None23.1
    
    Consent of Ernst & Young LLP
    
    
    23.124
    
    Power of Attorney
    
    
    None31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    
    
    31.131.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    
    
    31.232
    
    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
    
    
    32
   *
    
    Filed as an exhibit to Imperials Registration Statement on Form S-1 (File No.
33-96518) filed with the Commission on September 1, 1995, pursuant to Section 5 of the
Securities Act of 1933.**
    
    Filed as an exhibit to the Companys Registration Statement on Form S-4 (File No.
333-03551) filed with the Commission on May 10, 1996, pursuant to Section 5 of the
Securities Act of 1933.***
    
    Filed as an exhibit to the Companys Form 10-K for the year ended December 31,
1999 (File No. 0-26960).****
    
    Filed as an exhibit to the Companys Form 10-Q for the quarter ended June 30,
2000 (File No. 0-26960).*****
    
    Filed as an exhibit to Amendment No. Two to the Companys Registration
Statement on Form S-4 (File No. 333-03551) filed with the Commission on June 19, 1996.******
    
    Filed as an appendix to the Companys definitive proxy materials filed on
September 29, 2001.*******
    
    Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 (File No. 0-26960).********
    
    The Company hereby agrees to furnish the SEC, upon request, copies of the

instruments defining the rights of the holders of each issue of the Companys long-term debt. 79